The Government’s Role, Externalities, and Efficiency
Our free-market system is run on basic human nature. Self-interest is a guiding force in the free market that allows buy-
ers to create demand and suppliers to set prices. This economic freedom is not present, however, without the guidance
of the government. Although the government does not control the economy, the structure it gives the economy helps it
run more smoothly.
The two main tools the government uses to intervene in the market place are antitrust policy and regulation. Antitrust
policyis the principal behind the notion of fair competition. The government promotes competition to create efficiency
in the economy. If a company were to monopolize a market, it would be eliminating competition. Economic regulation
involves a larger role for the government. It ranges from prescribing output and pricing in certain industries that are
failing on their own, to temporarily running and operating a business. Normally, the government’s role is to allow the
forces of supply and demand to regulate the free market. But there are instances when supply and demand needs a
nudge from the government.
The September 11, 2001, terrorist attacks left the economy reeling from a lack of spending and confidence. One indus-
try that was affected the most was the airline industry. This industry suffered huge and insurmountable losses that
threatened the survival of the largest airline companies. Without air travel, businesses became slower, less efficient,
and less reliable. In this instance, a lack of demand wasn’t necessarily indicative of consumers’ true feelings toward air
travel. Rather, this lack of demand was created by an extreme disaster. So the question became, what should be done?
Should the government have let the forces of supply and demand take over and eventually revamp the airline industry?
Or should the government have taken a more proactive approach? The answer depended on time. If the government
stood by and let the economy regulate itself in this situation, the airline industry may have recovered, but in the process,
countless more jobs would have been lost. So the government intervened and put together a monetary aid package to
keep the airline industry alive.
It is important to remember that it is not the government’s responsibility to revive failing industries or businesses. Rather,
it is the responsibility of the government to do what is best for the economy as a whole. If an individual business is failing,
this is a normal occurrence of the free-market structure. Failing businesses are replaced by new businesses, and the cycle
continues in a free-market environment.
The Government’s Role
In our economy, the role of the government consists of six major components:
■ Promote and secure competition:When competition is present in a market, producers are forced to become
more efficient. Competition also protects the consumers. It improves the quality and price of goods and services
for consumers. Whether the government should ensure competition in all instances is debatable; however, the
need for competition in a free-market system is a given.
■ Protect private property rights:When there is no market failure, we have social benefits equaling social costs.
This allows the government to create laws to protect the interests of private citizens. Property rights should be
clearly defined because they create efficiency. It is the government’s responsibility to clearly define and protect
property rights.
■ Provide equity:The government’s responsibility to close the widening gap between the poverty threshold and
the middle class is becoming more important every day. The disparity of income in the U.S. economy is part
of capitalism; nevertheless, too large a gap affects productivity. The government’s responsibility to redistribute
income is not at issue; rather, how muchof income should be redistributed can be questioned.