Question

Concept: “If the ‘invisible hand’ of competitive markets is so efficient, why does government get into the act?”

1. The student’s understanding (in own words) of the concept/principle:

2. A practical example illustrating the concept/principle: The rationale or reason why the concept is important in economics:

3. What two (2) critical assumptions underlie the concept/principle?

4. Provide two (2) critiques or counters of the assumptions outlined above..

Answer 1

1) Competitive market structure is one of the fundamental principles of economics. It states that a competitive market weeds out the incompetent and the rest drive the market at its most efficient pace. This market structure function with out any undue governance.

2) However, some of the sector needs Government interference to operate in a proper manner. Sectors like defence and pharmaceutical has greater Government influence as the dictates national and public interests that are core values of human welfare.

3) Past has provided number of cases that show invisible-hand of competitive markets is efficient. One of the most intriguing case study is the insurance sector of India. India for a long time had a close insurance market where only Government and State run enterprises were to operate. This lead to the creation of a market where resources were getting wasted, inefficiency in operations were rising and customer satisfaction was missing. As soon as the government opened the market to private and foreign players, the inefficiencies started diminishing and incompetent institutions started going down due to the increase and better competition.

4) Two assumptions are there should be no coerced market forces present and the laws of supply and demand provide the sole basis for the economic system, without government intervention.

5) Joseph E. Stiglitz has criticized the concept saying that the market is often invisible cause practically it doesn't exists. Another criticism was made by Stephen LeRoy who states that if the free market are efficient at allocating resources than why do financial crisis shows the exact opposite.