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A government might step into a market economy for three essential reasons. Firstly, the presence Of rules and regulations, especially the enforcement Of property rights by the government, is of key importance to a market economy. In a recent reporting by the Downfall Magazine, India was observed to be going in a wrong direction, being completely against intellectual property, patent and copyright protection. This is expected to severely effect Indian’s key industries as well as broader relations with the United States and Europe. (Kern, P. 013) On the other hand, expiates living in Indonesia could soon get property ownership rights after the government announced it wants to open up the residential real estate market to foreigners (Clan, R. , 2013). This, in turn, could increase investments from foreign companies to Indonesia and expiates would be contributing more to the state income through taxes if they were allowed to own property. Secondly, a government may also step in in the presence of market failure, a situation in which the market fails to produce an efficient allocation of sources.
One possible cause of market failure is an externalities, an example being pollution. China’s government is currently planning to fast-track expansion and investment in energy saving technologies in an attempt to tackle its worsening pollution problems. China’s massive economic growth has come at a major cost to its environment. (Duggan, J. , 2013). In such situations, since the market has no incentive to improve the condition, a government intervention is required.
Another cause of market failure may be arrest power, in which one of the players of the market is large relative to the market (such as a monopoly), and so has the ability to abuse the market price. One example of market power would be airline hubs. The US government recently took steps to forbid the merger between two airline companies. This, they justified, by pointing out how mergers in the past have always reduced competition and increased prices, thereby abusing their market power. (Stewart, B. J. , 2013) Thirdly, it may also Step in if the market fails to allocate its resources in an equitable manner.
The market’s prime incentive is profit, which is why it does not concern the market whether or not goods and services are being reached to the whole economy. This is where the government intervenes, and puts forth public policies that aim to achieve a more equal distribution of economic well-being. (Manama, G. N. , 2012) In conclusion, it is evident that the highest economic performance may be achieved with the market and the government both playing their roles, to allocate scarce resources efficiently as well as equally.