BCM105 Economics For Business Module : Fountain Essays

Question:

Purpose of the Assessment To assess understanding of key principles and theories in economics and the ability of the students to apply these principles and theories to business and management scenarios.

Assessment Task

For this assessment you are required to discuss:

a) The advantages of Government intervention in the economy when markets fail.

b) The drawbacks of Government intervention when markets are assumed to be functioning normally.

The assessment aims to demonstrate that the students understand the importance of conditionality, that is, the dependence of advantages and disadvantages on the assumption of market failure.Economic interventionism (sometimes called state interventionism) is an economic policy perspective favouring government intervention in the market process to correct the market failures and promote the general welfare of the people. An economic intervention is an action taken by a government or international institution in a market economy in an effort to impact the economy beyond the basic regulation of fraud and enforcement of contracts and provision of public goods. Economic intervention can be aimed at a variety of political or economic objectives, such as promoting economic growth, increasing employment, raising wages, raising or reducing prices, promoting income equality, managing the money supply and interest rates, increasing profits and so on. Students are expected to understand the drawbacks of intervention when the government will go against the requirements of the market such as price-fixing.

 

Answer:

Introduction

The intervention of government in the market depends on various conditions. The intervention of government in the business practices is a means of controlling unnecessary activities in the market where business organisations operates their operations against each other. The government also intervene in the economy when market faces tough situation related to demand and supply or facing challenges in coping with inflation rate. However, the essay discusses the advantages of the government intervene in the economy and shows how it helps the market from various types of failures such as labour market failure, financial failure, commodities market failure, or product market failure. In the second part of this essay, it has been discusses that how the intervention of government in the economy leads to several problems and challenges for a normal functioning market.

What is Market Failure?

The market failure is a major concern for the government and it forces the government to take appropriate steps and recover the market. The general term of market failure means when market fails to attain the standards of “a perfect competition in the general equilibrium of economics. In simple words, it can be said that market failure occurs when the economic participants cannot get the way to push the market in right direction to get the acceptable results (Balassa, 2013). It is also considerable that failure of market negatively affects the economy of a country because of the non-optimal allocation of resources. It can be also said in other ways that social cost to manufacture the products or services cannot be minimized at the stage of market failure.

 

Government Intervention in the Economy and Its Advantages

Government always try to make a balance between demand and supply in the market. However, when failure in the market occurs then government decides to intervene in the economy to repair the market conditions. The government tries to fight with market failure with several tools and techniques such as taxation, subsidies, regulations, policies, etc. (Balassa, 2013). The government make the policies in such a way that helps the market to eliminate the inefficiency. In an optimal market conditions, resources are allocates in the required amount, which is necessary. While the inefficiency and inequalities in distribution of resources leads to market-failure and it can be overcome by the government by several economic intervention in the market (Bond and Goldstein, 2015).

The most effective way of eliminating the market failure or support the market from the tough situation is to provide social welfare support and reduce the monopolistic situation form the market (Roth and Dressler, 2012). The government also raise the entry cost in the particular market and it helps the existing business organisations to avoid competition in the market. Raising taxes for the new business organisation and reduces the corporate tax for the existing business organisation also helps the market to raise and increase the profit. The advantage of government intervention in the economy through regulatory means directly control the market and try to overcome the market failure. Some social welfare goods are depleted in the country because that good is freely available for individuals to use and it causes depletion of those particular assets such as public parks (Mazzucato, 2016). The government needs to intervene in the use of these resources and ensure that these goods are not depleted in the country. This will help the government to increase the earning of a particular market and help to recover the market failure with such type of steps. However, by intervening in the economy the government have several advantages such as removing social injustice form the market, ensure even income distribution, and secured goods and services, and provide property rights to those people who cannot afford these things. The government can also take the steps regarding rising or declining in taxes regarding particular market to avoid market failure that directly related with the economic wellbeing of people (Singh and Zammit, 2019).

 

There are mainly four types of government institutions that directly deal with the people and their economic wellbeing. The first type of market observes and monitors the market activities and ensures no organisation can misuse their power to affect the competition in the market. The second type of institution deals with the economic rights of the market players and helps them to recognise their own right and duties to provide better products or services to the customers (Tahoun and van Lent, 2018). The third type of institutions is the stabilizing institutions that are independent in working such as central banks or regulatory bodies, which help the lenders to avoid certain crisis situation and help the banks to face the financial banking crises. The fourth and last institutions sustain the public support for market economies. They sort out recognise income and provide social insurance (Mazzucato and Penna, 2016). There are various advantages of government intervention in the economy when market fails. These advantages are as follow:

Regulate Legal and Social Framework: The government implement and forced the marketers to follow the laws and regulations that helps the government to ensure that everyone understand their roles and responsibility towards the customers and towards the people in which they operate the business.

Maintain competition: The government makes the policies to ensure that every business organisations in the market involved in offering similar kind of product with standard pricing. The government want to maintain the competition and eliminate the situation of monopoly form the market. The advantage of government to intervene in the economy is that people will be benefited with quality products with same prices (Tahoun and van Lent, 2018).

Re-distribution of Income: The government wants to reduce the gap between social classes in a capitalist economy. Intervening in the economy helps the business organisation to earn certain amount of expected profit by just removing the unnecessary elements and functionality from the market (Tahoun and van Lent, 2018). The great example of it when government imposes taxes for the bug dealers with greater tax rates rather than those who operate their business in the market on low scale. It will help the market to ensure equalities in the market in terms of profit and income from the business (Tahoun and van Lent, 2018). 

Correcting Externalities: Externalities mean those business or economic decisions that have direct impact on individuals or people. If the government make policies related to pollution or waste material, then this decision of government helps the people to gain social wellbeing. 

 

Disadvantages of Government Intervention When Market Functions Normally

Although the various government decision and interventions in the market not always leads to success or termed as rights decisions rather in sometimes, the government intervention termed as the poor economic decision of the government that raises the issues of the market (Roth and Dressler, 2012). This conditions generally raises when government intervene in a normal functioning of the market. Changes in taxation policies or changes in regulations related to business operations sometimes lead to failure of the market. Therefore, it can be said there are some critical situation where government fail to improve the market situation when market is already functioning in normal ways. It has been seen that sometimes government takes wrong decision when government faces political pressure (Carden and Horwitz, 2013). The government change or amend the laws and regulations related to markets unnecessary and it affects the functionality of the market. However, the intervention in the economy when market runs in its normal situation, leads to several challenges such as lack of competition may reduce the chances of innovation in the market, unnecessary rules and regulations may affect the profitability of the business organisations, and efficiency is also compromised because the government acts as a monolith. As everything related to economy is controlled or reviewed by the government, it will directly affect the nature of competition (Hafezalkotob, 2018).  

Although it is very rare to see in any economy where market is not influenced or intervene by the government. However, if anywhere, it is found then the market is normally based on the demand and supply factors. Almost every business organisation in the market is running the business for their own self-interest and profit gains (Roth and Dressler, 2012) However, some people or economists not agree with the intervention of government in the market and they are in favour of “free market” concept (Wright, 2018). The government also sometimes very loos with their regulations and with the economic interventions that leads to poor and unequal distribution of resources (Carden and Horwitz, 2013). Although when the government intervene in the market in normal situation it will lead to several challenges and drawbacks for the market and even it will lead to market failure as well. These are the following drawbacks of intervening in the economy when market is functioning normally:

The major disadvantage of government intervention can easily be detected in form of price ceiling which is the way of control the prices of products and services in the market with a maximum limit. The government generally determines how much maximum price can be charged for a particular products or services from the people. This is directly related with the government intervention in the economy (Carden and Horwitz, 2013). Price ceiling generally termed as effective when price is less than the free-market equilibrium price. However, the intervention of government in the economy also affects the demand and supply in the market and it leads to several other issues for the market. The ceiling of price may leads to the decrease in the economic surplus, which is a major concern for a country. The effect of government intervention can easily be seen on the GDP of the company because it directly related with government expenditure and income (Hafezalkotob, 2018). Normally in laissez faire economy, it has been seen that government leave the market on its demand and supply factors to set the prices of products or services and assume that market is best suited to allocate resources. However, when government interfere in the market with its own laws and regulations, these assumptions are generally rejected by the government.

The another thing that is crucial to consider while government is intervening a market that it leads to less incentives for the public sector employees and they paid less for their work. The government regulates the market with political interferences and with various level of bureaucracy, which directly affect the market growth and pricing strategies of the marketers because of strict rules and regulations and tough competition (Tahoun and van Lent, 2018). One thing is noticeable that when government spends on public goods and merit goods the government raised the bureaucracy and inefficiency in the market. However, it is generally assume by people that no model or market can run without intervention of government. The government intervention raises more problems than it solves in the market and the intention of government to maximise the resources in the market sometimes lead to backfire for the economy, market, and for government itself (Tahoun and van Lent, 2018). The control of government in the market and its frequent intervention affect the profitability of the business organisations because they have found themselves as bounded for fixing the price of products or services. Even the government want to set a standard price in the market, business corporates face challenges with maintaining the level of demand and supply at the given price in the market. Although it is really essential for the government to control the economy to ensure a healthy competition in the market but when market runs in its normal way then it leads to several other economic problems for the market and economy both (Hafezalkotob, 2018).

 

Conclusion

On the basis of above study, it can be concluded that government intervention is better when market faces challenges because the policies and regulations of government helps the market to correct the market failures and help to achieve the more distribution of income of wealth for the people. The intervention of government in the economy helps the country to rectify the market failure that will further help the country to improve the economic situation. However, it is also true that without government intervention we cannot assume any model or market to perform in effective ways. However, the intervention of government in normal market leads to some serious challenges for market and economy both and creates problem for the marketers to set the prices of goods and services. It will also affect the profitability of the business organisation and affect the competitive positions in the market. However, it can be said on the basis of above study that intervention is necessary for the market when it faces difficulties but intervention in the normal run of the market have some serious threats for both marketers and economy of the country as well.

 

References

Balassa, B. (2013) The theory of economic integration (routledge revivals). UK, London: Routledge.

Bond, P. and Goldstein, I. (2015) Government intervention and information aggregation by prices. The Journal of Finance, 70(6), pp.2777-2812.

Carden, A. and Horwitz, S. (2013) Is market failure a sufficient condition for government intervention. Library of Economics and Liberty, 1.

Hafezalkotob, A. (2018) Direct and indirect intervention schemas of government in the competition between green and non-green supply chains. Journal of cleaner production, 170, pp.753-772.

Mazzucato, M. (2016) From market fixing to market-creating: a new framework for innovation policy. Industry and Innovation, 23(2), pp.140-156.

Mazzucato, M. and Penna, C.C. (2016) Beyond market failures: The market creating and shaping roles of state investment banks. Journal of Economic Policy Reform, 19(4), pp.305-326.

Roth, R.J. and Dressler, W. (2012) Market-oriented conservation governance: the particularities of place. Geoforum, 43(3), pp.363-366.

Singh, A. and Zammit, A. (2019) Globalisation, labour standards and economic development. The Handbook of Globalisation, Third Edition. Edward Elgar Publishing.

Tahoun, A. and van Lent, L. (2018) The personal wealth interests of politicians and government intervention in the economy. Review of Finance, 23(1), pp.37-74.

Wright, G. (2018) The political implications of American concerns about economic inequality. Political Behavior, 40(2), pp.321-343.

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