Answer to Question #139441 in Macroeconomics for Arundhati Dey

Question

Do you think markets are a good way to organize economic activity?Provide two real-world situations where government intervention in a market economy might improve the economy’s performance

Answer 1

$$Solution$$

Yes, markets can be deemed as a good way to organize economic activity.

It is a place where the buyers and sellers meet for the exchange of goods and services which is an economic activity.

Adam smith who is considered a father to economics argues out that, there exists an "invisible hand" which drives a market and this invisible hand works through the price system and regulates the economic activities:-

• The interaction of buyers and sellers determine prices
• Each price reflects the good's value to buyers and the cost of producing the good
• Prices guide self- interested households and firms to make decisions that in many cases, maximize today's economic well - being.

Secondly,  the government intervention in a market economy improves the economy's performance through the following ways;

1. Enforcing property rights ( with courts, police)-People are less inclined to work, produce, invest or purchase if large risk of their property is being stolen
2. Market failure occurs when the market fails to allocate resources efficiently-private firms thinks of profits. So, government has to intervene because it has to think of the welfare of the people but this intervention should be there till the point of welfare is reached and after that point, the government should allow the firms to take decisions.

Sometimes market failure occurs due to an externality which is the impact of one person or firm's actions on the well being of a bystander e.g there is a battery manufacturing company which releases a lot of pollutants in the air and there is a car paint shop beside that company and the pollutants create a lot of problem for that paint shop , so this can be considered as an externality.

In this case, the government can intervene and make some laws regarding the release of pollutants or compensation for the affected company or shop.

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