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Reasons why government regulation is needed in a market economy

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Running head: LONG TERM INVESTMENT DECISIONS 1
LONG TERM INVESTMENT DECISIONS
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LONG TERM INVESTMENT DECISIONS 2
Reasons why government regulation is needed in a market economy
The main aim of government involvement in the market economy is to achieve efficiency
and equity. These can be achieved when the marginal costs of production and consumption
balance with the marginal benefits of production and consumption (Labonte, 2010). The
expectation of the market is to come close to achieving this result. According to current markets,
this is usually not the case hence some government regulation is needed to enforce this balance.
Private markets produce goods and services that attract a lot of external costs with little external
benefits. For an imperfect competition market, goods and services produced by the market may
not reach the efficiency levels required.
Public goods need regulation so that they cannot be misused. Public goods are available
for consumption for everyone. Public goods are freely available and the firms producing these
goods have a problem in determining the benefits of consuming the good or service. Public
goods include national defense and law enforcement. For example if the government do not
produce laws, we expect some firms to produce the laws. Because of the free nature of the laws,
many of them will not meet the efficiency levels required (Labonte, 2010). The government
should also legislate on protection of consumers as well as ideas and innovations. Government
intervention is necessary so as to ensure efficiency.
External costs are caused by manufacturing firms. These firms do not incur the costs that
arise from their products. For example, a firm may produce goods that pollute the environment.
The cost of pollution will be incurred by the consumer. Private benefits are generated when a

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