The need for government intervention
The inherent failure of the free enterprises’ system to fulfill expectations of the society informed the need for government to intervene in the economy. The free economy was expected to ensure:-
- That all those who are willing to work get employed.
- All those who are working get their salaries in line with their productivity;
- The factor of production is optimal, and production and distribution patterns of the national product are such that all get sufficient income to meet their basic needs like food, clothes shelter, education, medical care, etc.
But the market economy has failed over the years to achieve the above because of the following shortcomings:-
- Market economy assumes project competition working which entails the market to have free competitions, the exclusion principle, absence of public goods, etc but we all know the present day market economy, this cannot be met as the government will always provide public goods and exclusion principle cannot work.
- Market economy assumes that individuals are the best judge of his own interest. Such that the individual will see his choice and decisions would be the best. But we are influenced by habits, ignorance, prejudices, advertisements, etc.
- The market economy is basically motivated by profit. Profit is the main objective of a free enterprise. But this excessive focus on profit makes the free enterprise to invest areas or sectors of the economy, which pays back their investment faster. Vital and essential sectors with lower profitability are left alone, even the sectors are of strategic importance for the national economy.
- low rate of return on investment; and
iii. collective consumption of these public utilities, which makes exclusion principles non-applicable. The government cannot leave the production and pricing of these utilities to private enterprises.
- The market economy works through competition; which means equal efficiency of firms. But we know that no two are equally efficient. The most efficient firm may swallow up others to lead to growth in monopolies and unequal distribution of income.
- The market economy does not function efficiently where the exclusion principle is not applicable. Exclusion principle means that those who do not pay for good should be excluded from the consumption of such goods, and those who do not derive any benefit from a good should be excluded from bearing the cost of that good.