Access over 20 million homework & study documents

search

Reasons why government regulation is needed in a market economy

Subject

Business

Type

Essay

Rating

Showing Page:
1/7
Running head: LONG TERM INVESTMENT DECISIONS 1
LONG TERM INVESTMENT DECISIONS
Name
Instructor
Institution
Date

Sign up to view the full document!

lock_open Sign Up
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

Sign up to view the full document!

lock_open Sign Up
LONG TERM INVESTMENT DECISIONS 3
firm activity benefits external entities outside the exchange market (Labonte, 2010). Government
legislation is necessary so as to control external benefits and costs.
In an imperfect market competition, the demand of goods is trending downwards forcing
firms to increase the cost of the product above the marginal cost. This will lead to an inefficient
allocation of resources, and consumers are likely to pay more than the marginal cost.
Government policy is necessary so as to control prices in an imperfect competitive market so as
to protect consumers.
Government legislation is also required in merit and demerit goods (Labonte, 2010).
Merit goods are the ones that consumers tend to use at small amounts but have high benefits.
Demerit goods are the ones that have little value and their costs are high. A government policy
will encourage consumption of merit goods and services while discouraging demerit goods.
Rationale for the intervention of government in the market process in the United States
To justify the rationale of government intervention in the United States, let’s take an
example of gasoline fuel. The government should ensure that the prices of gasoline are moderate.
The prices of gasoline have been rising for some time now. This has been contributed by the rise
in global demand of oil. The ability to meet the demand for oil is limited, and there is instability
in the Middle East. The United States has not built any oil refinery for over 30 years. All this
issues have contributed to increase in prices and in the future, oil shortage is likely (Labonte,
2010). The government should come up with legislations to safeguard the citizens against such
expectations.
Several proposals have been made to control the price of gasoline in the country. The
congress proposed a bill to classify the organization of petroleum exporting countries (OPEC) as

Sign up to view the full document!

lock_open Sign Up
User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Anonymous
Super useful! Studypool never disappoints.

Studypool
4.7
Trustpilot
4.5
Sitejabber
4.4