Question

What are the justifications given in favor of more government involvement in the market economy? What are the reasons given in favor of less government involvement in the market economy?

Answer 1

A market economy refers to an economic system in which the decisions about the investment, production and distribution are taken by the forces of demand and supply. In market economy the justifications given in favor of more government involvement is because of the primary functions performed by government discussed as follows:

1. Efficiency: The government must attempt to correct market failures such as excessive pollution and monopoly to ensure efficient function­ing of the economic system. Externalities (or social costs) arise when firms or people impose benefits or costs on others outside the marketplace

2. Equity: Government programmes targets for promoting the equity use taxes and spending for the redistribution of income toward particular groups

3. Infrastructure: The government should provide an inte­grated infrastructure to directly or indirectly improve the output levels or effi­ciency in production.

4. Economic Growth or Stability: The governments rely upon taxes, monetary regulation and expenditures to enhance the macroeconomic stability and growth to reduce inflation and unemployment while encouraging eco­nomic growth

On contrary freedom is important in competitive market economy because it allows privately owned entities to compete for the consumer's money. Freedom of choice allows resource owners, business owners, and consumer’s freedom to perform to advance their own self-interest. Business acts as an engine in a market economy. It provides employment that allows people to earn money and products and services that they can buy with the money they earn. Without an efficient business, the economy would be very primitive and/or very inefficient.