The Government's Role in the Marketplace: A Comprehensive Analysis

This report provides a detailed analysis of the government's role in the marketplace, focusing on instances where market mechanisms fail and require intervention. It explores various types of market failures, including those caused by externalities, monopoly power, incomplete information, and the provision of public goods. The report examines how governments utilize antitrust laws, such as the Sherman Act, to maintain fair market competition and address issues like price fixing and market sharing. It also delves into the government's response to positive and negative externalities, illustrating how policies like subsidies, taxes, and regulations are employed to mitigate adverse effects and promote social welfare. Furthermore, the report discusses the government's role in addressing information asymmetry and its impact on managerial economics, emphasizing how government policies influence business decisions. Finally, it highlights the importance of understanding the government's involvement in international markets, including the use of quotas, tariffs, and regulations. The analysis is supported by examples from the U.S. legal system and economic theory.

Running head: GOVERNMENT'S ROLE IN MARKETPLACE
Analysis of government's involvement or role in the marketplace
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1GOVERNMENT'S ROLE IN MARKETPLACE
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

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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.

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Figure 1: Government intervention in market place
(Source: Zhang, Fan & Mo, 2017)
Government role in maintaining fair market condition
In 1911, In a Supreme Court case named as Standard oil co. of New Jersey vs. United
States, the standard oil corporation was alleged of using practices, which was harming the fair
competition of the market. It entered into different mergers and amalgamations, which helped the
company to dominate the market. The prices were not fairly charged for oil. As a result,
government intervenes in the situation and the verdict of the court divided the company into 33
smaller companies who later on started competing with one another (Lamoreaux, 2019). This
example shows that government uses the antitrust laws as a tool to maintain the fair competition
in the market especially when the market structure is monopolistic and oligopolistic. These are
the some market structure where there is presence of dominant players in the market. Antitrust

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laws are very important to regulate these type of market structures (Khan & Vaheesan, 2017).
The first antitrust law in United States was Sherman Antitrust Act, 1890. This act covers every
contracts and combinations, which creates threat to the free trade of the country. This law was
mainly designed for the monopolistic practices done by different companies (Goldberg & Mohs,
2018). The other two significant antitrust laws are Federal Trade Commission Act and Clayton
Act. The federal trade commission act aims at reducing the unfair trade practices to win over the
existing competition in the market. It does not have any criminal penalties (Lipsky et al., 2019).
The Clayton Act regulates those mergers and amalgamations, which can affect the competition
negatively and increase the prices of products unreasonably in the market (Greaney & Ross,
2016). Moreover, these acts were amended further and strengthened by bringing Celler-Kefauver
Act. It prohibits those mergers and amalgamations, which would create monopoly in the market.
It was designed to remove and minimize the loopholes of the three major antitrust laws. This act
targeted conglomerate and vertical mergers.
Government intervention in free rider problem
Public goods are one of the important segments of the microeconomics, where
government plays an important role to bring equality in the consumption process of the
economy. The roads, bridges, healthcare programs, research and development programs, defense
services, clean water and air and education are considered as public goods by the government.
The public goods are always a controversial segment in economics because of its two different
parts which are non-excludability and non-rivalrous consumption (Hazelkorn & Gibson, 2019).
Non-excludability does not exclude anyone whether one pays for these goods or not. Non-
rivalrous feature of public goods means the supply of these public goods are made in such a way
that free riders can enjoy its benefits without competing with others who are paying for those

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services (Graves, 2019). Government role is very important in case of public goods. For example
– when a lake is polluted, government cleans the lake and the clean lake is now available to
everyone. However, cleanliness has some cost. It can be charged by the government. The
government can charge the industries and other recreational users for using the clean water of
lake. This intervention cannot solve the free rider problem at once but at least it reduces the
problem to some extent. The government sometimes defines the property rights related to water
bodies and land use, to curb the public goods problem. Like if government starts giving private
property rights of elephants just like cow, these endangered species can be saved from extinction.
The countries where government has given property rights against endangered species are
Namibia, Botswana, Zimbabwe and Malawi (Gutu et al., 2017). However, the property rights
cannot be solution if the public good is the air. For example- government can bring penalties and
regulatory norms for reducing the rate of ozone layer depletion but cannot induce property rights
against using the air.
Government intervention in case of information failure and incomplete information
Incomplete information may result in failure of the information, which can result in the
failure of market. Sometimes there is asymmetric information in the market like one participant
has different information and the other participant has some different information. This can also
result in market failure. For example in stock exchange, if a person has wrong or incomplete
information about any stock, his investment would result in losses. In the similar way, if any
consumer does not have complete information about prices, technology and risk related to the
product, which he is purchasing, he might end up purchasing wrong product, which will not
serve his utility (Pasquariello, 2018). Government set up campaigns generating awareness among

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consumers relating to the different products, which it considered important. For example-
products like fruits, grains, milk etc. (Mihalache & Bodislav, 2019).
Government intervention and managerial economics
Companies produce goods as per the country’s social and economic policy. Managers try
to forecast the demand and supply of the proposed product by keeping in view of the government
role. They normally avoid producing such quality goods, which can attract government litigation
against them. Any increase in the tax rate, strict policy regarding license of producing any good,
instability in the political environment, can discourage investments in any particular business
sector to which the policy relate. Government policy regarding interest rate can make loans
expensive and which can affect the corporate borrowings too (Tong, 2017).
Corporate social responsibility and corporate governance are the basic practice that every
business is following to sustain in the economy where government role is increasing day by day
for consumers protection and welfare. Rules and regulations imposed by government affect most
of the decisions that a manager of a company takes. Therefore, a manager should understand that
how he could efficiently make the decisions that it efficiently matches to the company’s goal and
complies with the regulations. Perfect competitive markets have less intervention by the
government as the prices are decided by demand and supply mechanism because of the presence
of many buyers and sellers in the market. Sometimes market fails where market does not achieve
the efficiency and the desired social surplus. In this case, government intervenes for bringing
economic efficiency (Ritz, 2018).

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References
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Graves, P. E. (2019). Externalities, public goods, and property rights revisited: regulations based
on traditional B–C analyses are too lax. Journal of Environmental Economics and Policy,
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Greaney, T. L., & Ross, D. (2016). Navigating through the Fog of Vertical Merger Law: A
Guide to Counselling Hospital-Physical Consolidation under the Clayton Act. Wash. L.
Rev., 91, 199.
Grolleau, G., Ibanez, L., & Lavoie, N. (2016). Cause-related marketing of products with a
negative externality. Journal of Business Research, 69(10), 4321-4330.
Gutu, M., Anastasiadou, C., Omar, M., & Osei, C. (2017). Foreign Direct Investment in
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Economic Perspectives, 33(3), 94-117.
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Lipsky, T., Wright, J. D., Ginsburg, D. H., & Yun, J. M. (2019). The Federal Trade Commission
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