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Role of the state in a market economy

Bayzid Bappi The role of state on market economy and how the politics influences the economy 1. A market economy is an economic system based on the power of division of labor in which decisions regarding investmentproduction and distribution are taken based on demand and supplyprices are determined in a free market system.

State capitalism vs the free market: Which performs better?

Free market economy has become the only dominating economic system in the world after the collapse of socialism in Soviet Union and other East European countries.

Today, the application of market mechanism is widespread all over the world. Although state regulation in the modern market economy is carried out in a much smaller scale than it used to be in the command-administrative system, the economic role of government is still high enough, especially compared with the system of free competition Uk Essay. But at present, the pure characterized market economic system is very difficult to find out all over the world. Every state take some economic policy for role of the state in a market economy economic growth, capital accumulation, implementing social policy for social wellbeing and general strategy of socialization in the broadest sense.

For this reason state regulates the market to implement the policy. In Bangladesh perspective, economic system of Bangladesh is a mixed economic system.

Politics and economy are integrated part of each other. From the beginning of state the politics and economy are walking hand to hand. The state politics and economy is interrelated to one another. The main task of state government is performing economic activities successfully. So the political influence on economy is historical. There are many economic factors which influence the economy that can be national or international that can be positive or negative.

The market economy and what would be the government roles in the market economy that is a controversial and debated issue and it is important to know how politics influences the economy. From the importance, in this paper are discussed what should be the role of government in a market economy. Is the government role would be supportive or regulatory. At first the theoretical framework will be discussed then analysis of what would be the role of government in a market economy and how politics influences the economy.

In first analysis the role of government in market economy are discussed from various perspectives. In second analysis, how politics influences the economy is discussed.

Economy that relies largely upon market forces to allocate resources and goods, and to determine prices and quantities of each good that will be produced. Capitalist economies are market economies, while managed economies are less so answers. An economy in which scarce resources are all or nearly all allocated by the interplay of supply and demand in free markets, largely unhampered by government rationing, price-fixing or other coercive interference. The greater the proportion of the goods and services produced in the society that are allocated by market processes rather than by government edict or the operation of unchangeable customthe more meaningful it is to refer to its economy as a market economy PM Johnson.

It has some characteristics which are mandatory to be a economy as market economy. This allows the owners to make legally binding contracts to buy, sell, lease or rent their property. In other words, their property gives them the right to profit from ownership. However, there are exclusions to what is considered private property. For example, since 1865 the U. This includes your own body or body parts.

University of Auburn, Market Economy 2. Their only constraint is the price they are willing to buy or sell for, and the amount of capital they have.

Although the motive is selfish, it works to the benefit of the economy over the long run. That's because this auction system fairly prices all goods and services, accurately depicting true supply and demand at any given point in time. That's because, as soon as demand increases for a particular item, prices rise thanks to the law of demand. As competitors see there is additional profit to be made, they start production, adding to supply.

This lowers prices to a level where only the best competitors remain.

  • There are many such causes as macroeconomic stability, high investment in human capital, stable financial system, limited price distortion, agricultural development behind the miraculous development and economic growth that are addressed by the world bank;
  • Why mixed economy is suitable for Bangladesh;
  • The state role will be supportive to a market economy;
  • Due to absence of control on foreign exchange, free market economy, especially in developing countries, is at times instrumental in causing shortfall in forex reserve;
  • Although state regulation in the modern market economy is carried out in a much smaller scale than it used to be in the command-administrative system, the economic role of government is still high enough, especially compared with the system of free competition Uk Essay.

This force of competitive pressure also applies to workers, who are competing with each other for the highest-paying jobs, and consumers, who are competing for the best product at the lowest price. In an efficient market, all buyers and sellers have equal access, and the same information upon which to base their decisions.

Prices rise and fall freely depending purely on the laws of supply and demand. It also makes sure that everyone does have equal access to the markets.

For example, government exerts penalties on monopolies, which unfairly restrict competition. The government watches to make sure no one is unfairly manipulating those markets, and that all information is distributed equally Kimberly Amadeo.

At presentIt is difficult to find out the all major characterized market economy all over the world. The example of a pure market economy does not exist in world economic system. It is regarded that The most bright example of market economy is U. United States succeeded to build a free market economy. One reason of success is the U. The term market economy used by itself can be somewhat misleading. Different perspectives exist as to how strong a role the the market produces Wikipedia.

Government should have in both guiding the market economy and addressing the inequalities. In this case of role of state in market economy, there are two schools about it. One school says that the regulation and intervention of state on market is not permitted. The state role will be supportive to a market economy. Government will give the freedom to run it in its own way. Other school says that the state will play regulatory role in market economy.

The politics and economy is integrated part of each other. The national politics and international politics are based on economy. From the primitive society to present the economy has been influenced by politics. The national economic system varies from country to country for the variation of political system of individual country.

  1. The regulatory roles of government for the development and high growth were government adopted such sound fundamental policies as control inflation, manage internal and external debts, resolve the macroeconomic crises quickly and promote export, make market more effective, creating market where they are not exist, create atmosphere conducive to private investment and ensure political stability.
  2. Adam Smith introduced the concept of the invisible hand, which refers to the free functioning of the price market system in the absence of government intervention. Famous economist Kautilya considered establishment of rule of law, protection of private property rights and creation of an efficient bureaucracy as prerequisites to prosperity.
  3. From the primitive society to present the economy has been influenced by politics. A Glossary of Political Economy Terms.
  4. Kazi Shafi Kul Alam, 2012. The government watches to make sure no one is unfairly manipulating those markets, and that all information is distributed equally Kimberly Amadeo.

Role of state in market economy: The role of state in market economy will not be regulatory and interventional. In a market economy, economic activities take place without intervention by the government except to regulate fraudulence and ensure some semblance of market discipline, if necessary Kazi Shafi kul Alam.

The state will provides private property right but no regulation no subsidiary, no single monitory system, no governmental monopolies. It can be explained with price floors. For example-Bangladesh government has passed a regulation that the minimum salary of garments worker BDT-5300. But the market minimum price equilibrium price of worker is below of BDT-4000.

Price floors usually put in the benefit sellers. For the high price of worker the employer demand of worker will be decreased. Consequently, there will be a shortage. The production will be decreased so that the economic growth will be hampered.

  • Other school says that the state will play regulatory role in market economy;
  • Kimberly Amadeo, April 17, 2014 2014.

Graph of price floor: Second school; Regulatory role of state in market economy: Famous economist Kautilya considered establishment of rule of law, protection of private property rights and creation of an efficient bureaucracy as prerequisites to prosperity.

According to him, a king should increase the productive capacity of the economy so that his subjects could enjoy a higher standard of living and the king in return won their support and collected a larger amount of tax revenue, which helped in expanding the productive capacity further and thus the virtuous cycle continued B S Sihag-2007.

According to him, private property accumulation is the right of the people and the king government must provide property right according to law that means free market but the government as regulator. State regulation of economy has become necessary for the implementation of social policy, and general strategy of socialization in the broadest sense. Collective consumption or satisfaction of social needs healthcare, education, support for the poor, organization of scientific research, habitat protection, etc.

State regulation of economy, thus, is determined by the emergence of new economic needs market cannot cope with by its nature Zhang 169-196. They argued that Objective possibility of state regulation appears when a certain level of economic development, concentration of production and capital is achieved. Necessity that turns this possibility into reality is the growth of problems and difficulties, which the state regulation of economy is intended to settle.

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Under free market economy there is ample opportunity for the businessman to adopt unfair and un-ethical practices as there is no intervention by the government. Due to absence of control on foreign exchange, free market economy, especially in developing countries, is at times instrumental in causing shortfall in forex reserve.

The market economy is not very suggestive for a developing country. The regulatory roles of government for achieving high economic growth, high capital accumulation, efficient allocation of capital is very important, for instance the brightest example is the miraculous development and economic growth of East Asian countries.

Role of the Government in a Market Economy | Economics

There are many such causes as macroeconomic stability, high investment in human capital, stable financial system, limited price distortion, agricultural development behind the miraculous development and economic growth that are addressed by the world bank.

The regulatory roles of government for the development and high growth were government adopted such sound fundamental policies as control inflation, manage internal and external debts, resolve the macroeconomic crises quickly and promote export, make market more effective, creating market where they are not exist, create atmosphere conducive to private investment and ensure political stability.

Free market economy is highly suggested for developed countries because their socio-economic structure is developed. Influence of politics on economy: The brightest example of political influences in economy is United State. The government rescued the United States economy from the great depression by increasing demand and lowering taxes.

President Franklin Delano Roosevelt gave a economic recovery plan, recovery and reform and brought about a major realignment of American politics.

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In this case, president was played a great role to overcome the situation. There are many areas in which the government influences the economy through legislation. For example, after independence of Bangladesh a number of industries had been nationalized by legislation for increasing production and economic growth. But after few years the nationalized industries were failed to bring a desired returns and were collapsed from market, for instance the Adomgi Jute Mille.

  1. The regulatory roles of government for achieving high economic growth, high capital accumulation, efficient allocation of capital is very important, for instance the brightest example is the miraculous development and economic growth of East Asian countries.
  2. State regulation of economy has become necessary for the implementation of social policy, and general strategy of socialization in the broadest sense. And last, but not the least governments tax their citizens and redistribute the revenues to the poor as also the elderly retired people.
  3. For example, in state capitalists, governments influence bank lending, or outright own large and important segments of the economy. Ragnar Nurkse developed the inter connected vicious poverty circle.
  4. Famous economist Kautilya considered establishment of rule of law, protection of private property rights and creation of an efficient bureaucracy as prerequisites to prosperity.

The another factor of politics that influence the world economy is international politics. From 1850-1920 the international politics were dominated by European countries that continued to shape and influence the world economy through strong arming trade, modernization and colonization.