Answer to Question #185181 in Macroeconomics for hafsa

Question

The Government has various tools available to deal with the Market Failure, the few of the tools available to the Government was

·        Price Profit Regulations

·        Restrictive Trade policy and practices

·        Direct Controls or Regulations

·        Patents and Law of Tort

·        Subsidy Policy

·        Tax Policy

·        Foreign Exchange Policy.

Briefly provide your views on all the above to predominantly sustain for an Economy in Market forces.

Answer 1

Price Profit Regulation

Price profit regulations put a cap on the price and also on the rate of return to the producers or the investors. Under this regulation, management has to reduce costs because of regulatory lag. It is related to the scenario where prices are determined by costs. It predominantly sustains an Economy in Market forces as it leads to a more secure environment for investors than exists under an only price cap regime where profits get fluctuated. There will be a low cost of capital and a high level of investment funds when the environment for investors is more stable and secure.

Restrictive Trade policy and practices

This tool is used to protect some sectors of the economy from rising foreign competition. Government adopt restrictive trade policies and practices by imposing exercise duty or import tariff to control excessive import or export of certain sectors of economy.

Direct Controls or Regulations

This tool involves regulations like taxation, subsidies among others which control market failures. Government raises taxes to reduce demand or provide subsidies to increase demand and consumption. This way it sustains market forces of economy.

Patents and Law of Tort

Patent is an exclusive right granted for an invention whereby one cannot venture into production of certain good without the patent owner's consent. Law of tort on the other hand offers monetary damages as compensation for proved harm on goods to sustain economy in market failures.

Subsidy Policy    

Subsidies are in form of cash or tax reduction given to promote social good or an economic policy. Government provide subsidies promote production of goods and services.

Tax Policy

Government uses this policy to control market forces by determining the taxes to levy, the amount and to whom. Tax can encourage or discourage production of goods and services.

Foreign Exchange Policy.

Government uses floating exchange rate which allows foreign exchange market to set exchange rate. Forex traders thereby control market failures with this tool by using the changing rates to their advantage.