Long - Term Investment Decisions



Long - Term Investment Decisions

Explain why government regulation is or is not needed, citing the major reasons for government involvement in a market economy. Provide support for your explanation.

The functioning of the economy, in principle, does not need government intervention. This is because the mechanism of market economy does automatic adjustments of economics. For instance, scarcity raises prices and an increased price induces the end of scarcity. In such a situation, there is no need for the government to interfere in the economy. However, there are situations in which the market alone does not fit or make automatic adjustments. These situations are commonly called, 'market failures' (Stiglitz, 1999). When the market fails, government intervention may be important to put the businesses in the economy into a higher level of well-being. But there is also the threat of 'government failures'. These are problems that cause the government to intervene in the economy.

Whenever a government announces a new program or a new law, the citizen-voter who wishes to analyze benefits and costs of this intervention may wonder: what is the market failure that is in wants of such fix? The idea behind this exploration is to deduce whether government intervention will not generate 'government failures' that worsen the general welfare of the concerned stakeholders.

The market economy exists only because the government is there. Therefore, the first function of government is to ensure that the economy can function (Stiglitz, 1999). Moreover, it is also important to analyze why and how the government can intervene in the economy to address market failures.

The government has the primary role in ensuring the right to private property. It is necessary that there are institutions like the police and justice, protecting private property from theft and expropriation. The government also has to impose restrictions on competition, deal with public goods, control externalities, work towards income distribution and manage information asymmetry in various markets in the economy (Stiglitz, 1999). Finally, once the market system by nature is decentralized, there are cases where the lack of coordination between the parties requires that an entity outside the market i.e. the government intervene to form proper coordination (Stiglitz, 1999).

Justify the rationale for the intervention of government in the market process in the U.S.

The U.S. government intervened in the market process through the implementation of fiscal and monetary policy measures that aimed to counter the effects of the recent global financial turmoil in the economy. These measures were a requirement to mitigate distortion characteristics of the capitalist economy and free market operations. The principal of these distortions is the mismatch between supply and aggregate demand; the consequences are more relevant to the two most important economic problems in the U.S., which are low and deflated growth and unemployment. These fiscal and monetary policies aimed to coordinate quantitative easing of cheap money into the economy to infuse growth (Brodwin, 2012). These are the mechanisms by which the State, through the government, tried to mitigate the effects of the aforementioned ...