Government’s intervention into the market economy is one of the most fundamental debates in the economics. To what degree should the market be free is also a very controversial issue. Nevertheless, multiple market failures, negative externalities and asymmetric information justify the governments’ active role in the economic development.
Firstly, free markets are not interested in providing the public goods and common resources for free. Therefore the government has to collect the taxes and grant financing of the infrastructure, justice system, national defense, etc. that can be beneficial for all citizens. In terms of the common resources, the government should prevent the overconsumption and depletion of the resources (Labonte, 2014, p.14-15). Otherwise, the environment in which the people live would be much worse, but some companies would benefit from higher sales.
Secondly, free markets sometimes lead to the creation of monopolies and consequently to the socially-inefficient prices or quantities of the products. So there are three options that may help to limit the negative impact of the monopolies - antitrust policy, public regulation, and public ownership and operation (Stigler, n.d.). The role of the government in all these options cannot be overstated.
Finally, due to the asymmetric information between suppliers and buyers sometimes there are very inefficient outcomes. For instance in the financial markets there are several types of asymmetric information: monitoring costs, moral hazard and adverse selection (Bebczuk, 2003, p.7). In late 2000s the world suffered from the economic recession and only by means of the proactive national governments the negative trends were stopped.
In conclusion, one should realize that it is impossible to create a totally free market. At the same time, a government may apply the liberal policies and intervene only when the market needs it. Such an approach is usually applied in the developed countries, and after every economic crisis the regulations are updated in order to prevent the society from similar market failures in the future.
References
Bebszuk, R. (2003). Asymmetric Information in Financial Markets. Introduction and
Applications. Cambridge University Press. Retrieved from
http://catdir.loc.gov/catdir/samples/cam041/2002045514.pdf
Stigler, G. (n.d.). Monopoly. The Concise Encyclopedia of Economics. Library of Economics
and Liberty. Retrieved from http://www.econlib.org/library/Enc/Monopoly.html
Labonte, M. (14 June 2010).The Size and Role of Government: Economic Issues. CRS
Report for Congress. Retrieved from https://www.fas.org/sgp/crs/misc/RL32162.pdf
