In a free economic system, the decisions made by the buyers and decisions made by the suppliers, determine equilibrium prices and levels of output, in a free market. Scarce resources are thus allocated according to the competing pressures of demand and supply. An increase in demand of a product, signals the producers to increase the supply of the commodity, as potential profit levels increase so as to meet the increased demand. The working of a free market mechanism is a strong tool which has been used in determining allocation of resources among competing ends (Riley, 2006).
There exists an increased claim that when issues, and policies are left on their own economic devices rather than instigating a state control on them, it would result to a more harmonious and equal society with increase in economic development. This concept is based on the liberal theory of economics which was first believed to be formulated by Adam Smith. It proposes a society where there is minimal government intervention in the economy. When government intervenes in workplaces, does it result to economic development?
This is an issue of contention between various economists, and we shall look at both the advantages and the disadvantages of government intervention in working places and the effect on economic development (Mishra, Navin & Geeta, 2006). The government has various goals and it may intervene in the price mechanism, in order to change resource allocation, with a view to attain a specific social or economic welfare. The government intervenes in the free market system so as to influence allocation of resources in ways that will be favorable in meeting their goals.
These goals might include correcting a market failure, achieving a more equitable wealth distribution in the economy, or general improvement in the performance of the economy. These interventions however come with a certain cost on the working of economic systems (Mishra, Navin & Geeta, 2006). Government has continually set rules and regulations that govern conditions and operations in work places. These rules and regulations, may affect supply or output of a certain commodity. We shall examine different areas that the government has intervened in work places and its consequent effect on the economy.
It is in order for government to intervene as it has multiple macro-economic goals of achievement of economic development, full employment, and price stability, among others. These goals sometimes are contradictory as the achievement of one goal affects the attainment of the other (Brux, 2008). Price controls In various work places the government can impose price controls. There are two forms of price controls which can be imposed by the government. The government can impose high prices for certain goods which are referred to as floor prices. This is a price that is set in which a commodity cannot be sold below this price.
Consumers are thus required to pay high prices for these commodities regardless whether the demand is low or otherwise. It ensures that the income by the producers of these commodities is higher than they could have otherwise obtained in a deregulated market (Petkantchin, 2006). The other type of price control is what is referred as price ceiling. It is a price that is set by the government, whereby suppliers are not allowed to exceed this price. It is an incentive to ensure that needy buyers or consumers can obtain this commodity at a lower price.
This control is mostly found in the main utilities such as telecommunications, water, gas and others. Free market economists argue that this control increases the burden of costs to businesses which damage their competitiveness as a result of huge amount of red tape (Riley, 2006). When prices are freely set by the market, they easily regulate the economy. Producers are able to determine which products are highly valued and preferred by the consumers, they help them ascertain the management methods and technologies which will produce the greatest economic well being.
Firms therefore attain incentives in order to innovate, integrate desired management skills in order to produce the desired commodities. Prices are also good indicators of the availability of resources. If the price of a commodity increases as a result of shortage, it signals the producer that, the there is a need to cut back on wastage of that resource, and efficient use of it. In general terms, prices enable economic players to enhance the most efficient use of scarce economic resources.
When the government controls prices, whether in form of a price floor or a price ceiling, then it becomes a disadvantage to the economy (Petkantchin, 2006). The government requires that in order for a certain business to be conducted, a license is necessary. This is a form of government intervention in work places, since it creates barriers to entry for potential competition. According to Brux (2008), licenses are issued to ensure that customers are protected from inferior quality goods and services. Licenses however, are harmful to these consumers when they are a requirement of the law.
This is because they reduce the availability of a certain commodity or service in a particular area, more so when there is a quota on the number of licenses to be issued. It is also detrimental to the well being of the consumers when the license fees are so high that smaller competitors cannot afford. This limits entry to a certain market which can be a way of creating monopoly. Prices charged on the commodity are higher than when there is a more liberal market. This affects the economic well being of a nation. The government also intervenes in work places by the use of fiscal policies.
It alters the level and the pattern of demand for a particular commodity in the market which has its consequences in economic development. One such policy is the use of indirect taxes on demerit goods. This includes goods such as alcohol, tobacco consumption among others. Their consumption comes with a certain cost on the health or the general welfare of the consumer. The government induces such taxes, in order to increase the price and thereby increase the opportunity cost of consumption. Consumer demand towards such commodities decreases. This intervention means that these industries would not perform at their optimal point.
They reduce their production so as to cater for the reduced demand of their commodities. It is a compromise on full employment that macro economic policies try to achieve, and as a result lower the level of economic development (Brux, 2008). Employment laws that govern businesses have been put in place by the government. They are a form of government interventions that also affect economic development. In the employment law, the government offers some legal protection for workers by setting the maximum working hours or setting the minimum wages to be paid to workers.
Organizations are thus controlled in form of wages paid to workers, which should have otherwise been left to be determined by the competitive laws of labor demand and supply. The effect of this intervention is an increase in the amount that an organization spends on wages. There is also a limitation that is placed by the government in form of working hours. This acts to curtail production levels which have a negative effect on the GDP. The profitability of the firm is also affected by increasing its operation costs. This reduces organizational profits that would have been used to increase the level of organizational investments (Riley, 2006).
When the government pays subsidies, it intervenes in the work places as it will obtain the money from businesses and public borrowing. This is an increase in public expenditure which means that the government has to increase the interest rates in order to attract funds from investors. Increase in interest rates has negative effect on businesses. This is because the cost of borrowing finances for investments increases which reduces the overall profitable ventures that are available for the business. The overall activity of business is thus curtailed or in more general terms the level of investment in the economy decreases.
A decrease in the level of investment reduces the aggregate demand which inhibits economic development (FunQA. com, 2009). Government intervention is sometimes in form of tariffs. The government intervenes in imported products by imposing high taxes on them. They do this in order for the government to earn income and protect the local industries. When a consumer consumes these goods, he/she pays high prices for them which make the consumer worse off. The consumer is thus forced to consume less of other products and services.
In the macro economy, the effect is to reduce demand of other goods and services which will make the economy to be worse off. This government intervention has a negative impact on economic development (Pearson Education Inc. , 2010). It is very common for both the small and big businesses to call in the government so as to protect them. Small businesses requests the government to offer them less regulation while increase the same on the big businesses. They also ask for fair pricing laws which act to hurt the consumers. Pricing laws keep prices for commodities high, since they come in form of price floors and hurt efficient competitors.
This is because efficient competitors are capable of offering the same commodity in form of quality and quantity at a lower price but the law by the government prohibits such. Competition is thus hindered to a greater extent as prices are maintained at a high level. If the commodity in question is an essential commodity, it would results to inflation which has adverse effects on economic development (Brux, 2008). Market Liberalization The government sometimes uses its power in order to introduce fresh competition into a certain market. This will happen in the case where the government breaks the monopoly power of a certain firm.
It ensures that competitors can penetrate the market which enhances the quality of products and services which are offered to the consumers. It introduces a more liberal economy, where the market is not controlled by one player who dictates on the prices and the level of output. These are the laws of competition policy, which act against price fixation by companies and other forms of anti-competitive behavior (Riley, 2006). Other benefits that arise from government intervention include correction of externalities. Externalities can be defined as the spill over costs or in some cases benefits.
Externalities make the market to operate in a level that the amount of output and the level of production are not at a socially optimal level. When there is a lot of corn being produced, the law of demand and supply will mean that price has to decrease as supply exceeds demand. When the government allows the price of corn to decrease beyond a certain level, the producers of corn will be at a loss which will de motivate further production of corn. In such circumstances, the government intervenes by the use of price floor where price would not go below that limit.
Leaving the market forces to adjust the price and output will socially affect some sectors of the economy and as such lead to the welfare of citizens being worse off (Pearson Education Inc. , 2010). Another reason as to why the government intervenes in the economy is to correct market failures. Consumers sometimes lack adequate information as to the benefits and costs which come from the consumption of a certain product. Government thus imposes laws that will ensure that the consumers have adequate information about the products so as to improve the perceived costs and benefits of a product.
Compulsory labeling that is done on cigarette packages is one of those legal concerns that give adequate health warnings to cigarette smokers. It is a way in which the government protects its citizens from exploitation and harmful habits that would affect them in the long run. This might have a short term effect in form of decreased profits on Tobacco manufacturers, but long term effects on improved health of consumers and a saving on future medical expenses (Riley, 2006). According to Riley (2006), it will be known that government intervention does not always result into the plans and strategies set or prediction by economic theory.
It is rare for consumers and businesses to behave the way the government exactly wanted them to behave. This in economics has been referred to as law of unintended consequences which can come into play in any government intervention. This would have negative consequences on the economic level since inappropriate policies would mean negative effects and influence. The market is able to maintain itself in equilibrium through price mechanisms and other economic factors. When the government intervenes, it affects this smooth operation of the market and this may lead to either shortages or surpluses.
The effect becomes worse when the government relies on poor information in making these interventions in workplaces. The effects might be expensive to the administration of businesses, and the interventions might also be disruptive to the operations of the business if these interventions are major and frequent. It might also remove some liberties (Pearson Education Inc. , 2010). Government interventions in workplaces should not be aimed to create great changes in the market. The conditions prevailing in the economy should be well reviewed and analyzed.
This will ensure that threats that can damage the economy have been identified and measures against such taken. It would be of great advantage if government interventions are designed to facilitate the smooth working of the economy rather than implementing a new and a direct control over the market. They should be assessed on whether they lead to a better use of scarce resources, whether fairness is being upheld in the intervention and whether the policy enhances or reduces the capacity of future generations in improving economic activity (Riley, 2006). Conclusion
Some economists believe that with perfect competition, there will be no need for any government intervention. Is it therefore wise to leave the economy to the doctrine of laissez-fare where there is no control or intervention by the government? As much as there exists some negative effects on economic development due to government control, the benefits which accrue as a result of controlled government intervention would be under no circumstances be compared with the risks that would accrue when the government adopts the liberal economic structure. References Brux, J.
(2008). Economics Issues and Policy. 4th ed. Ohio: Cengage Learning FunQA. com, (2009). Economics: Advantages and Disadvantages of Government Intervention? Retrieved 21 May 2010, from http://www. funqa. com/economics/92-Economics-2. html Mishra, R. Navin, B. & Geeta P. eds. (2006). Economic liberalization and public enterprises. ISBN 8180692574 Pearson Education, Inc. (2010). Reasons for government intervention in the market. Retrieved 21 May 2010, from http://wps. pearsoned. co. uk/ema_uk_he_sloman_econbus_3/18/4748/1215583. cw/index. html Petkantchin, V. (2006).
The Pernicious Effects of Price Controls. Retrieved 21 May 2010, from http://docs. google. com/viewer? a=v&q=cache:mYXWxJC6EpMJ:www. iedm. org/uploaded/pdf/avr06_en. pdf+Price+controls+and+their+effects&hl=en&gl=ke&pid=bl&srcid=ADGEEShvcqptHKj3Y_Mrxy5hhG7resIp_Y7FVbxWwhBqmLTBqzdSn3hvuXLutFYW9m1uRWom_D5InOy5G5Jp5AMTuCoFxKA-Rj-1tbrOA0PrnDz5VOBbruMR2HYdYcYm-SLf5Oq_aZBm&sig=AHIEtbTFfKO-NWp1d5bX2HTlouAB_gP1fQ Riley, G. (2006). Government Intervention in the Market. Retrieved 21 May 2010, from http://tutor2u. net/economics/revision-notes/as-marketfailure-government-intervention-2. html
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