Introduction
Microeconomics is a discipline that examines the economic functions of households and individual businesses. It is aimed at explaining the price factors and also determining the quantity of goods and services either demanded or consumed. This science can be regarded as the study of the choices that are made by firms, governments, or consumers. Microeconomics strives to understand how these decisions impact the market for certain goods and services. The government plays very important roles in regulating the microeconomic life of the country. Some of the functions include; providing legal basis for economic relations, sustaining competition, distribution, and redistribution of income, allocation of resources and lastly promotion of stability (Levy, 80). This paper will present a more detailed discussion of the functions that the government as an institution has to perform.
Discussion
Overall, the government plays a crucial role in providing the legal environment for microeconomic relations in the country. For example, this institution has to create the legislation which promotes or facilitates economic transactions and protects the rights of corporate citizens, employees, and consumers (Boyes & Melvin, 289). Businesses cannot flourish in countries where there is political unrest or corruption. Similarly, enterprises are not likely to succeed if there are no laws reinforcing property rights. This is one of the reasons why potential invertors can shun away from bringing capital to these countries. Therefore, it is paramount for any government to ensure that the state is well organized and that it has adequate legal mechanisms which regulate economic activity. Otherwise, businesses operating in this country will not achieve any considerable economic growth. Thus, legislative function of the government is critical for good microeconomic relations.
Government should also enforce property rights, contracts and impose penalties on those economic agents who violate existing norms and regulations. For example, this institution must ensure that intellectual property rights cannot infringed upon without impunity. In this case, one can refer to the intellectual property law established in the United State and Europe. The thing is that that foreign business will be more willing to operate in a certain country if they know that its legislation does protect their intellectual property. One should take into account that this sense of being protected by the law is indispensible for the microeconomic life of the state. The countries, which have failed to achieve this purpose, can hardly become advanced economies.
The government should equally empower contracts. They should enforce them by enacting appropriate legislation that will control the contracting process. The legislation should ensure that appropriate penalties or liabilities are imposed on the party that violates the terms of a certain agreement. Moreover, contract law must clearly prescribe the reimbursement that the parties have to pay. Through this process the efficiency of businesses will be enhanced since many people will see the sense of adhering to these agreements. Contact law is essential for any economic activity or transaction. The main task of the government is to make sure that the contracts really have binding power. Again, contract law is essential for attracting the foreign investors and ensuring that they feel protected. Therefore, one can surely say that legislative role of the government can strongly contribute to economic health of the country.
It is often believed that in capitalist economies the countries assume a laisser-faire attitude to economic relations which means that they are very reluctant to intervene in the market. However, the government interventions in the micro economy are unavoidable because these interventions can improve the allocation of resources, distribution of incomes, and economic exchange. For example, the presence of central banks as a government institution facilitates the exchange of currency and this is of paramount importance to commercial relations.
In addition to legislative function, the government also plays an important role in maintaining competition in the market. One of the tasks that this institution has to perform is to prevent the market from being monopolized by a single company or a small group of enterprises. In order to do that the state has to enact various laws ensure that a certain commodity can be provided by multiple suppliers that are able to compete in terms of price or quality. It is particularly important that the government intervenes when certain companies resort to illegal strategies in order to gain competitive advantage, for instance tying, exclusive dealing, or predatory pricing (Barnaul & Blinder, 220). At this point, the state cannot and must not act a passive observer. In this case, lack of interventions can negatively impact a large number of producers and suppliers.
If we speak about sustaining competition, we can mention that there are various forms of monopolies, for example, natural monopoly. Such situation occurs when a certain company (usually a pioneer in some industry) acquires leading positions in the market because its production costs significantly decline with time passing (Barnaul & Blinder, 220). The government allows it to run and regulate prices and services. For example, Commonwealth Edison is a natural monopoly; however, the government does not want to break it into several parts because such partitioning will not improve the distribution of electricity in the region. There, among various roles of the government one can distinguish the regulation of the market. Still, such form of intervention should be viewed as an exception rather than a norm. If it is possible the government should minimize its impact on market players.
This social institution can profoundly affect the distribution of income (Levy, 80). This role is particularly important for reducing economic inequalities within the country. The government can address the problem in several ways. First, the government can use Transfer Payments to make sure that there is equality in income distribution. Such concept as transfer payments refers to those transactions done by the government without expecting returns.
These payments include offering relief food to the impoverished people or providing some financial assistance to those people who are unemployed. Other examples of Transfer Payments are the Medicare and social security programs that are meant to assist the members of society who cannot afford medical assistance. All these interventions are tailored in order to help in redistribution of income among diverse and mostly disadvantaged groups of people in the society.
Another strategy that the government employs to strike a balance in distribution of income is the use of progressive Tax System. This system allows the government to take a greater percentage of the income of the rich than that of the poor (Levy. 81). For instance, the government may opt to tax 25% of people’s income if they earn a specific amount of money. Provided that their income exceeds this amount or limit, the tax rate will be increased to 35%. Such practice is adopted in many highly developed countries, for example Sweden or Finland. Hence, the distribution of income is one of the essential tasks the government has to perform.
In other instances this institution tries to bring equity in income distribution by modifying prices, especially enacting price ceilings and price supports. A price ceiling is the maximum price a seller may charge. This initiative is aimed at ensuring that certain products, especially necessities are affordable to the public. On the other hand a price support is the minimum price a seller may charge. Price supports are used by the government to raise prices, even if they do not correspond to the market value of a product. As a rule, the main rationale for this policy is to protect local manufacturer from external competition and subsidize them during the time of economic crisis.
Although price supports and ceilings are known to cause inefficiencies, they are sometimes considered very essential in helping the society achieve equity. Economists believe that the government to use price ceilings and price supports in realizing equity if the other methods highlighted above seems inappropriate. Again, one should bear in mind that such polices are exceptional, and they may contradict the principles of market economy.
The government is responsible for the relocation of resources. This occurs when competitive market produces the wrong kind of services or products or fails to produce at all. When these cases occur, the government intervenes to enhance the allocation of resources and realize allocative efficiency. There are three main market failures that results to allocative inefficiency in the absence of government interventions. One of them is the negative externalities that mainly consist of spillover and external costs. Negative externalities results when some costs of producing or consuming a certain good are not paid by the manufacturer or consumer, but imposed on a third party who may not necessarily related in market transactions (Hacklett, 56).
It is much better to illustrate this concept by example; in particular, we can mention air or water pollution. If the economic activity of a corporation, for instance an oil-drilling company adversely affects other people or industries, the government is obliged to intervene in order to make the organization pay the indemnity to those people who suffer from its activities.
When negative externalities occur, producer does not pay all of the costs related to the manufacturing of certain goods or services. Again, an example of an external externality is the company which damps waste products in the river thus killing various aquatic organisms such as fish. Evidently, such practice can harm various fishing companies and their partners.
When such a company is allowed to continue its business practices, the entire community will be disadvantaged.. Other products that have negative externalities are gasoline, alcohol and cigarettes. To avoid over-allocation of resources by such companies, the government controls their productions by enacting legislations that prevent smoking, drinking or pollution. These legislations can make the firm’s costs of production increase which in turn increases the prices of their products. In addition, the government can impose specific taxes on the amount of pollution, alcohol or smoking which also leads to higher prices of these products and subsequently decreases the demand for them (Hacklett, 56).
Thus, the task of the government is to make sure that economic activities of a company do not infringe upon the rights of other enterprises and do not result in their financial losses. In this case, the state acts primarily as a referee. Therefore, one can argue that laisser-faire position is not always appropriate for the government even when the country is a market economy.
In contrast, a positive externality occurs when the benefit of producing or consuming a product or service spills over to a third person who does not pay for it. Examples of positive externalities include public vaccinations, public libraries and parks and also education. Sometimes such positive externalities emerge when a certain company engages in charitable activities or volunteer work. The government can enhance the effect of positive externalities by providing subsidies to the companies which strive to benefit the community. For example, one can speak about various tax reductions for those enterprises which employ eco-friendly technologies. Thus, the state can promote corporate social responsibility not only by imposing fines but also by offering various bonuses to companies. Certainly, this role is not always compulsory for a government but it is preferable that they find strategies of achieving and increasing positive externalities.
The government is instrumental in creation of public good. Such term as public or social goods usually refers to those products or services that cannot be produced by the market players (Levy, 83). Examples of public or social goods include national security. These goods are usually provided by the governmental organizations and financed by compulsory taxation. Under the circumstances, the government acts as the monopolistic supplier of social goods.
Finally, the government has to ensure economical stability in the country. One of the ways to do it is to regulate the government spending and taxation. When the economic performance of the market declines and the total spending is minimal, the government can stimulate the market by increasing its spending on infrastructure or job training programs in order to minimize unemployment. Moreover, they can cut taxes for local businesses so that they could survive the times of economic crisis. This is one of the strategies that the government can adopt.
In addition it also lowers the interest rates through the central bank. When the economic activities are vibrant, the government may opt to reduce its spending and/or raise its taxes to maintain price stability. Similarly, the government can request the central bank to raise interest rates to ensure price stability (Gwartney, Lwason, & Holcombe 6). Thus, one can argue that the governmental institutions have to maintain economic equilibrium.
Summary
This discussion indicates that the government plays an important part in the microeconomic life of the country. This institution ensures that there are legal environment which enhances the safety of business activities. It also acts as a regulator that prevents the market from being monopolized by a single player. Moreover, the government ensures more or less equal distribution of resources by offering social programs and Medicare. The government helps in correcting the market failures when companies fail to produce or produces the wrong products and services. Lastly, the government helps in maintaining the economic stability by increasing or reducing its spending. Hence, this institution is instrumental for sustaining microeconomic relations within the country.
Works Cited
Baurnol, William and Blinder Alan. Economics: Principles and Policy.NY: Cengage Learning. 2011. Print
Boyes William and Melvin Michael. Microeconomics. NY: Cengage Learning. 2010. Print.
Hacklett, Steven. Environmental and natural resources economics: theory, policy, and the sustainable society. London: M.E. Sharpe. 2001. Print.
Levy, John. Essential microeconomics for public policy analysis. New York: ABC-CLIO, 1995. Print.