Economic systems – how economic resources are allocated, страница 4

3.4.Why governments exercise control over the economy

Many people believe that the market economy has several advantages over other types of economic system.Some of this ‘advantages’ are :

1.There is more freedom of choice for producers and consumers.

2.The system encourages competitions between firms.This compels firms to          strive for greater efficiency, becouse less efficient firms are driven out of business.

3.The more successful firms can earn higher profits. This gives firms an incentive to seach for new products and for new and better techniques of prodactions.

4.Large numbers of civil servants are not required to run the system.

5.The systems gives great power to consumers.Only those firms which supply what the consumer is prepared to buy will survive.

Over the years, however, certain features of the market economy have led to increasing dissatisfaction.This has led to demands for government to take actions to eliminate or reduce what are widely regarded as disadvantages of a market economy.Some of the major criticisms of the system, which governments have attempted to deal with,are set out below.The policies adopted by governments are discussed in Chapter 20.


Private ownership of land and capital enables those who are more successful in the world of business to accumulate large amounts of wealth.Private ownership also enables people to acquire wealth by inheritance rather than by effort.

Dominant firms.

Competitions allsows the more successful firms to drive out the less successful ones.This could well mean that, eventually, a very small number of large firms could come to dominate a whole industry.Such firms will have great market power which they could use to charge prices well above the costs of productions.This is most likely where an industry id dominated by a single firms, that is, where there is a monopoly.


The market system rewards those who are successful or more fortunate. It make no provision for the unsuccessful or less fortunate. Firms which suffer a serious fall in the demands for their products will fail. Workers will lose their jobs and shareholders will lose the money they have put into the business. Only the state can provide adequate help to those who fall by the wayside.

Social costs and benefits.

The costs incurred by a firm producing goods and services are described as private costs.In a market economy, these are the only costs which influence a firm’s decision to produce. Sometimes the production of a commodity imposes costs on society as a whole; these costs are not borne by the producer.

For example, the price of a good produces by a firm which pollutes the atmothphere with smoke from chimneys  or with unpleasant smells does not include the ‘costs’ of the nuisance and dangers suffered by the people in that neighbourhood. Firms in a market economy can ignore the social effects of their activities.

The benefits gained by a person who buys a good or service are described as private benefits. There are cases, however, where the market price of a product does not give a true indication of the total benefits provided by that product. For example, the price paid by an electricity authority for the removal of unsightly pylons and overhead lines and their replacement by underground cables would not be a good measure of the total benefits from this work.The community as a whole would place a high value on the improvement of the countryside when these ugly structures were removed. The value of this benefit would not be included in the price paid for the work done.

In planning projects such is airports, motorways and underground transport systems, governments now try to take into account all the costs incurred – these are described as social costs.They also try to estimate the value of all the benefits derived – these are described as social benefits.

Merit goods and services.

Merit goods are those which the government thinks everyone ought to have.The best exemples are education and health services.It is believed that in a market economy, at market prices, people would buy fewer merit goods than they ought to have. This would be either because thay could not afford to pay the priceof because they would not act in their own best interest.Many people, when it was too late, would wish that they had spent more on such things as health and education.