What is the role of the government in a market economy?

HomeWhat is the role of the government in a market economy?
What is the role of the government in a market economy?

Following Keynesian prescrip­tions governments in most countries took on a steadily expanding economic role, regulating monopolies, collecting income taxes and providing social security in the form of unemployment compensation or pension for the old people.

Q. Which of the following may be used in an attempt to correct market failure?

How do government attempt to correct market failure? The Government, when correcting market failure, take measures which consist of: Indirect taxation, subsidies, tradable pollution permits, the extension of property rights, regulation, buffer stocks and minimum prices.

Q. How does monopoly cause market failure?

In a monopoly, a single supplier controls the entire supply of a product. Supply can be restricted to keep prices high. This leads to underprovision, or scarcity. Thus, according to general equilibrium economics, a monopoly can cause deadweight loss, or a lack of equilibrium between supply and demand.

Q. What is the role of government in market failure?

Correcting the market, when it fails, is one of the most important responsibilities of the government. The private sector too has to play a part by not resorting to unfair practices. Correcting market failure is a major component of welfare economics. Falling markets have an impact on the overall economy of a country.

Q. How is market failure caused by monopoly power?

Abuse of monopoly power: An imperfect market restricts the output in attempts to maximize profits. Using the definition of a broad perfect competition, a market failure can be usually corrected by allowing consumers and competing sellers to shove the market towards equilibrium over a period of time.

Q. Why does the government intervene in the economy?

For all these reasons, any government anywhere in the world, whether conservative or liberal, intervenes in economic affairs. In a modern economy like our own, the government has to perform various roles mainly to correct the flaws (defects) of the market mechanism.

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