Analysis of Government's Involvement or Role in The Marketplace

Running head: GOVERNMENT'S ROLE IN MARKETPLACE
Analysis of government's involvement or role in the marketplace
Name of the student
Name of the university
Author’s name

GOVERNMENT'S ROLE IN MARKETPLACE
1
Government’s involvement or role in the marketplace
Governments get involved in market control when the normal mechanism of market
operations lead to instability or inefficiency in the market. Market can fail because of certain
factors, which are externalities, monopoly market, incomplete information and public good.
Externalities are the cost or benefit to a firm because of outside uncertain factors, which are not
related to the firm’s performance. These ambiguous and outside factors can influence a firm’s
performance positively or negatively. Government intervenes in the market when externalities
have negative impact on the micro economy or when it results in market failure.
Government’s role in case of negative externalities
Negative externality is referred to a cost, which influences the third party because of an
economic event. Here, the third party is referred to the other parties like any organization or an
individual different from the producer and consumer. When these third parties suffer negatively
from the economic transaction, it is known as negative externality (Grolleau, Ibanez & Lavoie,
2016). Government takes measures to prevent or minimize the effects of the externality. The
government can take actions or use market correction solutions to help the price related
externalities. It lays down fines and penalties, environmental taxes and allows civil lawsuits to
demand the recovery for damages occurred by negative externality. These steps by government
can alert the producers and direct them to produce goods at right quantity and of right quality.
The production should not be made at social cost and if made, there should be financial price
payable for it by the producers. Government intervention in case of negative externality can
prevent the producer to stop producing those goods that have higher financial cost and
unnecessarily increasing cost of production resulting in lower financial return. The producers

GOVERNMENT'S ROLE IN MARKETPLACE
2
will be able to calculate the cost of production more accurately considering all the financial costs
arising from negative externalities (Mihalache & Bodislav, 2019).
For example – whenever a person is smoking in a public place, the others standing near
the smoking person also get affected. People other than the smoking person have not chosen to
smoke but they are suffering. This practice results to negative externality as it is harming those
group who are not even buy these products.
Government’s role in case of positive externalities
Positive externality is a benefit that the third parties get from an economic event. Free
riders are those people who enjoys and get advantages of positive externality without paying any
cost for it. Government considers positive externality in the interest of the public as it encourages
social welfare and encourages free riders to utilize goods and services (Lazăr, 2018).
Government considers positive externality as a tool for encouraging social welfare. For
example- government provide subsidies and cheaper loans to producers so that they can produce
goods and services at cheaper costs. This helps in increasing supply of goods in the market and
since the cost of production is less, it can increase the demand for goods in the market too. In this
way, government can increase the supply of goods and services like education and healthcare.
The government is able to provide these grants and subsidies out of the taxes it receives from
public (Yülek, 2017). Examples of positive externalities are roads, airports, bridges, government
parks etc.