Different function of market and role of government in democratic society

Different function of market and role of government in democratic society

There are five major functions of market:

These five functions represent questions which must be answered by any economic system. In free enterprise questions.

(1) First, the market sets values:

In the market economy, price is the measure of value. This is really the age-old question of what is to be produced. The answer, demand important but also the dollar votes behind the consumer demand.

(2)Second, the market organizes production:

It does this in terms of cost. It is assumed in the study of price theory that the most efficient production methods will be used of that, of all possible methods of producing a product, the entrepreneur (the organizer of production) will use the method that maximizes the ratio of useful product output to useful inputs of resources, measured in monetary terms. This then is the familiar question of how to produce goods and services.

(3)Third, the market distributes the product:

This is the question of for whom the goods are produced, and it is answered through payments to resources. Those who produce the most receive the most. Neglecting inhe4ritances, nepotism, etc., we can see that, in theory at any rate, people and other resources get paid according to what they produce. Thus, the most productive people or those who own the most productive resources get paid the most and therefore are able to command the most goods and services.

(4) Fourth, the market rations:

Rationing is the essence of pricing, for it restricts the current rate of consumption to available production.

(5) Fifth, the market provides for the future:

Saving and investment take place in the market in an effort to maintain the system and bring about economic progress

Figure: Presents an idea of how the market answers these several questions. The consumer purchases goods and services from business firms in the product market in return for money. The households are the demanders of the goods and services, while the business firms answer these demands by supplying goods and services. The income of the consumer which is spent on these goods (commodities, products, etc.) and services is derived from resource payments. The households supply the factors of production (land, labor, capital, and entrepreneurial talent) to the firms who demand them to produce the goods and services, and in return the households receive money. These transactions take place on the factor market, while the goods and services transitions take place on the product market.      

The government should play the following roles in the democratic society to control the functions in the market:

For all the wide range of possible activities, governments have three main economic functions in an market economy. Although the market mechanism is an admirable way of producing and allocating goods, sometimes market failures lead to deficiencies in the economic outcomes. The government may step in to correct these failures. Its role in a modern economy is to ensure efficiency, to correct an unfair distribution of income (equity), and to promote economic growth and stability.

1. Efficiency:

Governments increase efficiency by promoting competition, curbing externalities like pollution, and providing public goods. Markets fail to provide an efficient allocation of resources in the presence of imperfect completion or externalities. Imperfect competition, such as monopoly, produces high prices and low levels of output. To combat these conditions, governments regulate businesses or p0ut legal antitrust constraints on business behavior. Externalities arise when activities impose costs or bestow benefits that are not paid for in the marketplace. Governments may decide to step in and regulate these spillovers as it does with air pollution) or provide for public goods (as in the case of public health).
Alas, there are many ways that markets can fall short of efficient perfect competition. The three most important involve imperfect competition, such as monopolies; externalities, such as pollution; and public goods. Now we will discussing about three of them:

Firstly- Imperfect Completion:

Imperfect competition occurs when a buyer or seller can affect a good’s price. For example, if the telephone company or a labor phone service or labor, respectively, some degree of imperfect competition has set in. When imperfect competition arises, society may move inside its PPF. This would occur, for example, if a single seller (a monopolist) raised the price to earn extra profits. The output of that good would be reduced below the most efficient level, and the efficiency of the economy would thereby suffer. In such a situation, the invisible-hand property of markets may be violated.

Secondly- Externalities:

It arises when there are spillovers or externalities, which involve involuntary imposition of costs or benefits.
Externalities: (or spillover effects) occur when firms or people impose costs or benefits on others outside the marketplace. Governments generally more concerned with negative externalities than positive ones. As our society has become more densely populated and as the production of energy, chemicals, and other materials increases, negative externalities or spillover effects have grown form little nuisances into major threats. This is where governments come in. Government regulations are designed to control externalities little air and water pollution, damage from strip mining, hazardous waster, unsafe drugs and foods, and radioactive materials.

Thirdly- Public Goods:

The extreme example of a positive externality is a public good, Public goods are commodities for which the cost of extending the service to an additional person is zero and which it is impossible to exclude individuals from enjoying. The best example of a public good is national defense. When a nation protects its freedoms and way of life, it does so for all its inhabitants, whether they want the protection or not and whether they pay for it or not.

2. Equity:

Governments promote equity by using tax and expenditure programs to redistribute income toward particular groups. Markets do not necessarily produce a fair distribution of income; they may spin off unacceptably high in equality of income and consumption. In response, governments can alter the pattern of incomes (therefore whom) generated by market wages, rents, interest, and dividends. Modern governments use taxation to raise revenues for transferring income-support programs that place a financial safety net under the needy.

3. Macroeconomic stability and growth:

Governments foster macroeconomic stability and growth- reducing unemployment and inflation while encouraging economic growth- through fiscal policy and monetary regulation.  Since the development of macroeconomics in the 1930s, the government has undertaken a third role: using fiscal powers (of taxing and spending) and monetary policy (affecting credit and interest rates) to promote long-run economic growth and productivity and to tame the business cycle’s excesses of inflation and unemployment. Since 1980, the blend of the mixed economy called the welfare state has been on the defensive in the enduring struggle over the boundary between state and market.

The following table summarizes the economic role played by government t.

Failure of Market

Economy Inefficiency

Government Intervention

Current Examples

of Government Policy

MonopolyExternalitiesPublic goodsEncourage competitionIntervene in marketsEncourage beneficial
Antitrust laws,deregulation Antipollutionlaws, antismoking ordinances
build lighthouses,
provide public education
Inequality :   
Unacceptable inequalities ofincome and wealth Redistribute incomeProgressive taxationof income and wealthIncome-support or
transfer programs
(e.g., food stamps)
Macroeconomic problems:   
Business cycles(high inflation and unemployment) Stabilize throughmacroeconomic policies Monetary policies(e.g., changes in money supply and interest rates)Fiscal policies (e.g., taxes and spending programs)
Slow economic growthStimulate growthInvest in educationRaise national savingsRate by reducing
Budget deficit or
Increasing budget surplus.

  Table: Government can remedy the shortcomings of the market.