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Optimal Degree of State Intervention in a Market Economy


Every business involves risks. The degree of the risk differs according to the size and the area of operation. To reduce the degree of risk it is essential to have a deep knowledge regarding the business and the market. A clear understanding about the business and the market is essential. The market is termed as an institution which is engaged in the exchange activities and serves the society by organizing various economic activities. In the market, price is a factor which is used to communicate to the various needs and wants of the society as a whole.

The government intervention in the market failure arises when the market faces substantial losses in the economy. The degree of the state and the government intervention will be at a higher rate when the company or an entity is facing economic failure. There are many possible forms for the government intervention to correct the expected market failure.

Discussion on the Topic

Market failure can be defined as “A situation, usually discussed in a model not in the real world, in which the behavior of optimizing agents in a market would not produce a Pareto optimal allocation.” (Moffatt, 2009).

In a free market when the allocation of resources is done in an inefficient manner, there arises the problem of market failure. The sources that lead to the market failure are externalities, zero provision of public goods, imperfect competition and inequity.

Externalities usually arise when the various costs that are connected with production function and the consumption function fall over to the third parties. In the externalities there are two types of externalities – positive externalities and negative externalities.

The positive externalities occur when the consumption of the commodity is beneficial for society. In the positive externalities, the role of the government is to make subsidies for the consumers and the producers. The negative externalities occur when a particular cost is incurred from the society for the consumption and production of the commodity. The government intervention in this area is the imposition of taxes on the individual firm.

The zero provision of public goods is mainly classified into two. They are non-rivalrous and non-excludable. Non-rivalrous means the benefits through the production of the product or services are not taken by other producers. The non-excludable products are those which are manufactured by the government alone and no other private agencies are involved in the production of such products.

The main causes for the market failure are social and private costs or benefits that diverge externally, the pure goods that are public and quasi-public, dominating the market and the misuse of the monopoly power and unfair equity issues. In a real market, perfect competition does not exist all the time. The imperfect market is a market situation where some of the essential conditions for perfect competition will not be present. In the imperfect market competition, a lump sum of tax is imposed on the monopolist and taxes are also charged for the high-level profits earned by the private firms. The government also interferes with the pricing policy of monopolist producers.

Inequity is entirely different from inequality. Equity is concerned with a normative issue. This deals with the distribution of the income which is considered to be fair. Therefore, the concept of equitable distribution is entirely different from that of equal distribution.

Market failure mainly occurs when the market operates freely and without any government intervention and when they fail in delivering and allocating the optimal resources. In such a situation, economic and social welfare cannot be maximized to a particular level. All these will lead to inefficiency in the economy. When the result from the competitive market is not efficient there arises the concept of market failure. It is the responsibility of the government to help the market to overcome the distortions and provide various ways to overcome and sustain the business of various producers in the market.

The market economy deals with mixed economies and government intervention, the government has the role in the fixation of the price, licensing the quotas and subsidizing the industries. The market economy by the transaction from the government not only deals with the economic reasons but also with the political reasons. As political reasons take place the topic of political remark becomes widespread. It should not be much administrative but also to be political, the market as a whole is of different kinds; they are the government, private, political and the bureaucrat, citizens and the government. The government has at times negative behavior; the increased transaction cost, monopolies restrictions, marketing imperfections, and the availability when failures occur may lead to the inefficiency of the market economy. The economists discover the market economy as the prior one to the free-market economy which is free from policies and restrictions. The constitutional economies mainly emphasize disabling the intervention of the state which is mainly impartial to the private sector, in the market economy, it includes reducing the size of the public administration, reducing the size of the public sector, insulating the state from the private pressures and then delegating with the rules for decision making and proper action. There are differences in the administration provided by the state to the private and to the public sector; the state has a lot of government pressure on the public sector despite the contribution of the private and the public to the economy. The political intervention by the state mainly has the influence of privatizing the public sector and then making them free from the other state government frontiers.

The feature of the state intervention policy includes the laws of the legislature, settlement of the disputes by the judiciary board, regulating all the economic plans by the Government. The Government acts as the ultimate law-making body in the economy.

The Arab markets as well as other international markets have faced a big threat during the recession that hit the market economy recently. The state took up a major role in providing the resources to tackle the situation, in spite of the ripple effect witnessed by the market. According to the report, UAE had suffered a lot in the beginning in comparison with the other countries. The Government lent a helping hand to the banks by guaranteeing the deposits with a cut in the interest rates; NASDAQ Dubai also received support from the local and the international banks through the refinancing of $5.2 Billion.

The UAE also had a decline in the oil prices affecting the real estate sector; this made a big loss in the economy. The government started different petrol pumps. This helped the oil reserves of the company to somehow cope with the situation.

As a result of the growing financial and economic crisis manifested by the decline in oil prices, minimal exports from the country nullified foreign direct investments. The government took regulatory action by the gulf cooperation council (GCC) which planned and implemented significant resources to the sustaining of the economic performance. The governments of the GCC countries first focused on recapitalizing the banking sector by purchasing toxic assets to strengthen the banks’ balance sheets and on issuing state guarantees on fresh loans to investment firms.

Traditional methods of marketing disappeared and the different methods of opportunity cost also disappeared and the market conditions are unbounded and proper symmetric methods lack a lot. There are a lot of inevitable interventions in the market economy by the state; they set different financial slabs for private firms in society, one of the other practices they put in is the ‘regulation’ especially in the US market which is a complicated one. The regulated firm has the cost of the output, demand and supply analysis, the legal authority to set up the prices of the products. The supply correlates with the demand in the market where it takes a major role.

Products of insurance, subsidiary, taxation are treated under very strict condition and which are liable to the law.

The state intervention has multiple effects and multiple results, this affects the consumers, employees, industries, private firms, employees and employers in such a manner as to provide the best result of the regulation and to avoid the adverse effects of the regulation.


The Government has a lot of influence in the market economy, the market failure and the success can be a result of the state and the legal intervention in the economy. The subsidizing intervention by the government is a better way of intervention in the economy; that is, by subsidizing the investment of the high company to the Small Company, this causes the gaining of consumer surplus. The understanding of the business market helps in the identification of the level in which they lack in the economy and the optimal plans for the recovery.

Reference List

Moffatt, M., 2009. Definition of market failure. About.com: Economics. Web.