The Role Of Government In The Economy Essays

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Government Intervention in the Market Place

The government may choose to set prices different to those set by the markets. Prices are not allowed to drop below a certain minimum. For example, in Agriculture, government may choose to subsidies farmers, set production quotas or offer price supports. Government may decide to set price ceilings or price floors. The government may also choose to increase or decrease taxes on certain commodities. In this essay, we will look at the effects of government intervention from an economic perspective. According to the Financial Mail (2006) In February this year, inflation rate in Zimbabwe reached the highest level in the world – an annual 782%. It is estimated that by the end of this month,…show more content…

Last year, the Zimbabwean government announced new price controls of basic food commodities in Zimbabwe to combat hyper-inflation. All companies producing and selling maize meal, which forms Zimbabweans staple diet, cooking oil, soft drinks, milk and sugar had to reverse recent price increases to their previous levels. The diagram below shows a price ceiling.
PRICE CEILING

Setting the price ceiling at a price below the equilibrium market price will create excess demand i.e. a shortage equal to Q3 to Q2. Therefore, a price ceiling creates a shortage whereby the quantity demanded exceeds the quantity supplied. When shortages occur a black market may develop. According to Parkin et al. (2006:120) "a black market is an illegal market in which the price exceeds the legally imposed price ceiling". This occurs where those consumers that have acquired the good sell it at an illegal price above the price ceiling. If we look at the situation in Zimbabwe black markets have emerged for commodities such as fuel. According to an article on the Zimbabwean watch by Makoni (2005) "the government has urged businesses not to increase prices of goods and services by more than 10%; a clause that, if previous years are anything to go by, will fall on deaf ears. The state is set to gazette new prices for basic commodities but analysts feel this move

The Role of the Government in the Economy Essay

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The appropriate role of government in the economy consists of six major functions of interventions in the markets economy. Governments provide the legal and social framework, maintain competition, provide public goods and services, national defense, income and social welfare, correct for externalities, and stabilize the economy. The government also provides polices that help support the functioning of markets and policies to correct situations when the market fails. As well as, guiding the overall pace of economic activity, attempting to maintain steady growth, high levels of employment, and price stability. By applying the fiscal policy which adjusts spending and tax rates or monetary policy which manage the money supply and control the…show more content…

Private businesses could not sell national defense to citizens and continue to stay in business, therefore is considered to be a public good. Selling defense services to those who are willing to pay for it and protecting them and not protecting those who refuse to contribute paying, could not be possible by any means. These individuals are considered as "free riders," which will not generally pay for something they can get free. That is the foremost reason national defense must be administered by the government and paid for through taxes. Unfortunately some people do not have the ability to earn a living in a market economy. Others benefit from inherited wealth, hard dedicating work, or owning their business. Governments in market economies inevitably engage in programs that redistribute income, and they often do so with the overt intention of making tax policies. On the other hand, advocates of extensive redistribution disagree and allege that role of government limits the concentration of wealth and maintains a wider diffusion of economic power among households, presently as antitrust laws are designed to maintain competition and a wider diffusion of power and resources among producers. Those who oppose major redistribution programs counter that additional taxes on high-income families decrease the incentives

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