The free operation of market forces does not always achieve the most desirable economic and social outcomes. Discuss reasons for government intervention in the Australian economy. The free operation of market forces does not always achieve the most desirable economic and social outcomes. Australia has a mixed market economy where the decisions concerning production and distribution are determined by a mixture of market forces with some degree of government intervention. Markets are not perfect.
They are extremely effective in determining what our economy produces and how production is organised. No other system of economic coordination has produced the level of prosperity, innovation and satisfaction of material wants. But markets are not enough. They only consider private economic interests, and not just broader social interests.
We live in a society, not just an economy. We need governments, not just to make markets function, but sometimes to change market outcomes when they are not satisfactory. The challenge is to find the right balance. Too much government intervention may stifle innovation, efficiency and growth.
Too little may leave us exposed to instability, inequity and a lack of basic community facilities. There are certain situations when the market fails to allocate resources efficiently, this is known as market failure. Market failure occurs with the provision of merit and public goods and when externality benefits and costs are associated with the production and consumption of certain goods. The value of merit goods to society justifies the government subsidizing the provision of these goods and services. Public goods have two important features: . Indivisibility in consumption.
They are fully accessible to everyone. It is often too costly, relative to the values people attach to the good, to exclude non-payers from consuming public goods. This results in 'free riding' which occurs when obtaining benefits without paying a correspondence share of the costs of obtaining these benefits. The competitive market is unlikely to provide public goods because of the free rider problem; there is a less than efficient level of production. The unregulated market economy results in an unequal distribution of income. Governments aim to limit the level of income inequality despite the fact that there are some perceived benefits from inequality.
Markets are by their nature unstable and this instability feeds through to fluctuations in economic activity. The changes in economic activity, resulting in the periodic but irregular expansion and contraction of the economic activity is referred to as the business cycle. The government attempts to smooth out these fluctuations in the economy through various policies, such as Monterey policy and fiscal policy. Together with Monterey policy, prices and income policy and external policy, fiscal policy is used to try and ensure the long-term stability of the economy.
Fiscal policy and monetary policy are important government instruments in terms of stabilising the economy. Fiscal policy is implemented through the budgetary process. The government can stimulate the economy by running a deficit budget, or dampen the economy by running a surplus budget. There are also built in stabilisers, which regulate the business cycle automatically.
Monterey policy, which is implemented through market operations, affects interest rates. Lower interest rates will stimulate the economy, while higher interest rates will dampen the economy. Another form of government intervention in the economy is designed to promote competition. This is achieved through the regulation and legislation laws. There has been an increasing desire expressed by Australians for a clean and healthy environment to which governments and politicians have had to respond. The majority of the environmental policies are the responsibility of State and local governments.
Because of the above factors, the government intervenes and modifies the operation of the price mechanism in order to achieve a better allocation of resources, a more equitable distribution of income and greater economic stability. Each of these functions of government intervention is curial to our economy.