Governments and markets are closely linked because authorities perform essential roles in developing the legal and institutional frameworks that would govern different operations within such contexts. The free-market economic systems call for restricted government activity and interventions to minimize the distortions that such control tools cause (Arora, 2017). Government interventions such as the provision of subsidies oppose the basic principles of the free market system because it could influence or offset the equilibrium conditions. Under the free market conditions, demand and supply are the primary determinants of the equilibrium market conditions. The government should only participate or intervene in free markets after careful evaluation of underlying factors and effectiveness of their subsidies at resolving the existing issues.
Government subsidies are known as strategic fiscal tools for controlling and monitoring the performance of the economy (Office of Fair Trading. n.d). The attainment of absolute market conditions is hard and mostly hypothetical because most governments play significant roles in their economies through their interventions such as the tax systems and subsidies. Government subsidies have been known to have a constructive or destructive effect on the economy, which has made them a persistent debate topic among numerous academic platforms.
The active participation of government in free markets requires the development of adequate strategies to promote the careful spending of allocated funds. Poor allocation and management of government subsidies may subject a nation to a chronic budget deficit. This aspect calls for the consideration of different factors before providing such interventions to firms and other sectors of the economy. Before making a subsidy allocation, the government should consider the kind of market failure and the ability of the intervention at resolving the issue. This aspect would require the consideration of imbalances in the distribution of economic resources, which raise concerns among different participants of the economy and citizens.
The government should only allocate subsidies as tools for addressing such market failures and restoring the confidence of different stakeholders such as the foreign investors, which would help to reduce the severity of the market failure (Arora, 2017). However, the government should refrain from the long-term provision of unchecked subsidies because of their adverse effects on the global competitiveness of its industries and economy. The policies of international trade aim at promoting fair competition and open systems that would promote innovation and brand equity. However, some governments subsidize their domestic industries to enhance their competitiveness in the global markets. However, such techniques diminish the benefits that would be acquired by consumers, organizations, and entrepreneurs.
The provision of subsidies reduces the ability of businesses and enterprises to focus on developing creative and innovative solutions that would improve their productivity and reduce their costs. Many firms and economic sectors have thrived and attained success without relying on government subsidies, which calls for the authorities to consider alternative interventions that would enhance the productivity and comparative advantages for their industries (Arora, 2017). This approach would help to increase the efficiency of firms and the economy through continuous process improvement that would optimize productivity and minimize the costs.
Before allocating the subsidies, the government should consider the urgency or need for attaining a specific goal and the ability of the subsidy to promote the realization of such objectives (Office of Fair Trading. n.d). The government may end up offering subsidies to industries and sectors that would result in disproportionate benefits and worsening of inequality. For example, subsidizing firms and products that are regarded as luxury brands would provide disproportionate benefits to the high-income groups and worsen the gap between the rich and poor. Governments should also consider the monetary cost of their subsidies and the target groups of such interventions. Subsidies are risky interventions to the free market because they increase the expenditure of the government and at times could fail to reach the targeted markets, which would result in the wastage of resources. Subsidies subject taxpayers to long term economic and monetary burdens.
Subsidies result in reduced production costs, which influence an increase or shift in output or the supply curve.
Subsidies also influence the reduced cost of products and increased propensity to spend among clients, which increases the quantity demanded. The net impact of subsidies relies on the amount allocated and the price elasticity of demand (Tutor2u. n.d.).
Subsidies are not viable for all product categories, but they would be highly beneficial for merit goods that could generate numerous positive benefits (Tutor2u. n.d.).
Perfect markets do not require government interventions because the equilibrium conditions are reflected in the different market prices. However, government interventions may be rationalized for redistribution of resources and correction of market failures, among other reasons (Deardorff, 2000). The optimization principles of free markets require the marginal benefits of a policy to exceed the marginal costs. The proper definition of costs and benefits for different control tools would help to interpret and understand the behaviour of different entities in the economy. Organizations use such principles when determining the productivity that would be required to realize a particular level of profits. Clients also use such principles when determining the level of consumption that would satisfy their needs. Therefore, governments too should observe such tenets to determine the best approaches that they should take when intervening in an economy (Arora, 2017). However, it is challenging to determine the optimal levels and interventions because of the interplay of numerous complex factors within an economy. Such factors may result in price failures and distortions that would require the government to step in and redirect the economy towards the specified objectives.
Government interventions such as the provision or withdrawal of subsidies and tax benefits would be used to address such issues as environmental damages, which would minimize the market distortions (Deardorff, 2000). However, the implementation of such policies often encounters different challenges that reduce their effectiveness or make them imperfect. When the economy faces distortions resulting from variations in costs or benefits from the true social costs and benefits, the government could intervene through subsidies that would help in offsetting the marginal costs or benefits and returning them to their true social levels. This aspect would lead to automatic correction and optimization of systems and productivity.
Another objective of government interventions in free markets is the distribution of wealth and income. This aspect would help in the optimal allocation of resources and the empowerment of low-income groups, which would increase productivity and reduce the market distortions. However, the redistribution of income is challenging because variations in policy could occur in real-time without the anticipation of those that would be affected (Deardorff, 2000). Governments could also intervene in the market to promote the realization of other non-economic goals such as optimizing the social welfare function.
In conclusion, the participation of the government in free economies through subsidies has diverse impacts that influence numerous contentions and debates. Governments should refrain from intervening in such contexts or situations because subsidies diminish the ability of firms to pursue creative solutions for their challenges. However, governments often provide their domestic firms with subsidies to improve their competitiveness in international markets and enhance their production capacities. Other reasons for the intervention of authorities in free-market contexts include the resolution of distortion, redistribution of resources, and other non-economic goals. However, scholars argue that government interventions should focus on addressing the specified issues or objectives to prevent the creation of unnecessary distortions.
Arora, R. (2017). Government intervention and financial sector development. In Development Finance (pp. 53-78). Palgrave Macmillan, London.
Deardorff, A. V. (2000). The economics of government market intervention and its international dimension. The University of Michigan.
Office of Fair Trading (n.d). Government in markets: Why competition matters – a guide for policy makers.
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