Goals of a well-functioning economy
A well-functioning economic system should ensure price stability. It should be able to control the rate of inflation such that the interests of both consumers and traders are met. High inflation rates negatively affect the consumer welfare while very low prices are detrimental to businesses. Besides, an economic system should ensure full employment. It must reduce unemployment rates to the levels at which all factors of production are engaged. The economy should also ensure equitable distribution of resources and production. The tax system should fair and equitable. A well-functioning economy should also enhance economic freedom (Colander 17). The economy should not restrict the income a firm and businesses can make. Besides, people should have the freedom to invest in every sector of the economy. It should also enhance economic efficiency. Economic efficiency involves resource maximization and reducing wasteful use of resources. Economic planners should also ensure allocative efficiency so that resources are put to the most efficient uses. Finally, a well-functioning economic system should ensure the economy grows at an acceptable rate. The growth rate should be adequate to ensure full employment and improved standards of living.
How a market economy achieves economic goals
In a market economy, decisions regarding pricing, allocation of resources among others are based on private interactions. The government plays no role in a market economy. A market economy automatically achieves the macroeconomic goal of economic freedom. Individuals and firms have the freedom to choose areas to invest as well as the prices to charge, among other decisions.
It also ensures price stability in the market since the market forces automatically adjust the price. When the economy is in equilibrium, and there is a shock such an excess supply, the price will fall to balance the economy. Besides, private entities have the freedom to set prices, but they do not have the power to dictate the quantity sold. If the market price increases, the quantity demanded will fall, and this may lead to excess supply. In the long-run, firms will be forced to lower the prices to sell all the quantity supplied. However, the market economy is not efficient in ensuring price stability, especially in the short-run. Market forces take too long to react to market shocks and restore the economy back to equilibrium.
The goal of fair and equitable distribution of resources is achieved in this system by making the market free to any business or individual. There are no barriers to entry of markets. However, fair and equitable distribution of resources is rarely achievable in a market economy. The resources of a nation in a market economy are concentrated in the hands of the wealthy. Besides, large corporations use their excessive market powers to prevent the entry of smaller firms in the market. This is because there are no regulations to ensure fairness in the economy. Individuals make decisions based on their private interests and not the welfare of the entire economy.
It is difficult for the market economy to achieve goals such as economic growth and full employment. These objectives require price stability, allocative efficiency, among other factors. It is impossible to control all these variables in a market economy hence achieving a desired economic growth rate may be difficult.
Effectiveness of mixed economy in achieving macroeconomic goals
A mixed economy allows some level of economic freedom with government regulation to achieve macroeconomic and social objectives. In this case, the government has laws as well as institutions to govern the economy. A mixed economy is effective in achieving price stability. The market forces are allowed to operate freely, but the government intervenes where there are market shocks. For instance, the Fed uses the funds rate to control inflation and ensure price stability. When the inflation rate is high, the Fed increases its fund's rate to reduce money supply in the economy thereby reducing demand-pull inflation.
Besides, both fiscal and monetary policies are effective in achieving the desired economic growth rate. For instance, the Fed manipulates the lending rate to achieve the desired inflation rate. The federal government also uses fiscal policy to boost economic growth rate. For example, the economic stimulus packages helped the economy to get out of the recession. The government through the Fed and other agencies control variables that affect the economic growth rate such as investments, savings, and taxation among other variables.
The mixed economy is the most efficient in ensuring equitable and fair distribution of resources. The progressive tax system enhances equitable distribution of the country’s resources. Besides, there are regulations to ensure fair dealings in the market. For instance, the Federal Trade Commission protects consumers from unfair practices. It also evaluates proposed mergers and acquisitions to avoid monopolies and firm with excessive market powers. Monopolies and firms with excessive market powers are detrimental to free competition in the market. For instance, the FTC rejected the proposed merger between Staples and Office Depot since it would adversely affect competition in the office supplies market (Wahba).
Besides, regulations are necessary for the stability of the economy. Without regulations, private entities can engage in unethical practices which can harm the entire economy. For instance, the 2008-2009 financial crisis was attributed to the irregular behaviors of investment banks and other players in the financial services sector.
Works cited
Colander, David C. Macroeconomics. New York: McGraw-Hill Education, 2012. Print.
Wahba, Phil. "FTC Rejects Staples-Office Depot Merger, Again". Fortune. N.p., 2015. Web.
30 Apr. 2016.
