What are the roles that government might play in attempting

What are the roles that government might play in attempting to correct the misallocation of resources in the market economy?

Solution

Markets do not allocate resources effectively if property rights are clearly defined or enforced. Externalities or spill-over effects affecting large numbers of people are associated with production or consumption of a product. Government’s role in the economy is to define, establish, and enforce property rights. In the absence of competition, government may then be used to control price, output, and quality.

Decision-making is fundamentally similar to decision-making by individuals and firms in that it is constrained by scarcity. The benefits of government involvement in the economy are most likely to outweigh costs when public goods and common goods are involved. When there is structural unemployment, state investment is necessary in education and training. If markets fail to provide public goods, government funded public goods should come up for collective consumption. When monopoly prevails, government should follow a competition policy that could encourage new firms entering the market. Government intervention should be limited to correct market failure, to achieve equitable distribution of income and wealth, and to improve the performance of the economy.

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