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Economics Essay

The free market operation of market forces does not always attain the most desirable
economic and social outcomes. Under a completely free market (laissez-faire) system,
some significant community wants are unsatisfied. Some individuals may be incapable to
earn enough money to live, and at times the market may cause economic stability.
Because of these factors, the government intervenes and alters the operation of the price
mechanism in order to achieve a better allocation of resources, a more equitable
distribution of income, greater economic stability and environmental preservation. Each
of these functions of government intervention will be considered below.

When the government reallocates resources it modifies the pattern of production in the
economy. A free functioning price mechanism leads to an allocation of resources which
society generally regards as being undesirable. Apart from its failure to adequately
provide for the satisfaction of collective wants, an unregulated price mechanism makes
no attempt to limit the social costs which may be involved in resource use. Moreover, a
free functioning price mechanism may well lead to the emergence of monopolies and a
divide misallocation of the nation’s scarce resources. To deal with their particular
shortcomings of the price mechanism, the government must alter the pattern of resource
use. It must in other words, reallocate resources.

The government largely uses taxation and expenditure to affect resource allocation. The
government also produces goods and services itself. The government can influence the
price of goods and services, and hence influence consumer demand, through taxes and
other charges levied on producers. Because taxes add to costs, they can have the outcome
of diverting resources away from certain types of economic activity. Similarly, a specially
reduced rate of tax can attract resources towards a specific sector. Often, the influence of
the tax system on resource allocation is direct. By changing prices, tax policies may
change the pattern of consumer demand and this will directly alter resource allocation.
The Australian government can use the tools of direct and indirect taxation to achieve
their resource allocation goals.
Government spending can either be used to directly reallocate resources to a particular
part of the economy, or to influence the decisions of consumers and businesses. Either
way, the government is attempting to rectify a failure of the markets to supply an
allocation of resources that fit’s the community’s broader needs and wants.
Lastly, governments sometimes involve themselves directly in the production process to
achieve a better allocation of resources. Australia has historically had a relatively high
level of government activity in the economy, with the governments providing most
infrastructure, such as the railway and public transport system, electricity distribution as
well as postal and telecommunications network.
A freely-operating price mechanism not only gives rise to considerable income
inequalities within the community, but tends to promote inequality of opportunity among
its individual members. Recent years have seen a widening of income inequality in
Australia, raising concerns that Australia could lose its ethic of being an egalitarian
society. Australian governments have generally accepted the view that government action
to create a more equitable distribution of income is desirable. While governments do not
aim to remove al of the inequalities between individuals, it is generally accepted that
societies should make provision for the needs of people who are not able to provide for
themselves- such as aged people, people with disabilities or illnesses and people who are
unable to find work. In addition, government policies generally aim to reduce some of the
gap between higher and lower income earners through redistribution policies.

The Australian government performs its redistribution function primarily through a


system of taxes and transfer payments. The method by which these bring about a more
even distribution is quite simple. The government reduces the incomes of some by
taxation, and increases the incomes of others through transfer payments.
On the one hand, Australia’s progressive income tax system means that high income
earners pay proportionately more income tax than low income earners. Those on very low
incomes pay no tax at all. By reducing these incomes at the top end of the scale
proportionately more than those at the bottom, governments bring about a relative
redistribution of income in favour of the lower income groups.
The Australian government redistributes its taxation revenue to lower income earners via
social welfare payments- the other major device for reducing inequality in Australia.
Payments are often means tested, which means that people on high incomes may be
ineligible to receive specific benefits, highlighting the fact that social welfare payments
are designed to reduce income inequality.

One of the market economy’s problems is that it is likely to give rise to severe and
recurring fluctuations in the level of economic activity. Historically, the fluctuations have
been characterised by bouts of high unemployment and periods of rapidly rising prices.
From any viewpoint, high levels of unemployment and high rates of inflation are
undesirable. The very interdependence which characterises the modern mixed economy
means that every member of society is adversely affected by them. In the short term,
Australia forgoes current output and therefore sacrifices present living standards. In the
long term, the presence of unemployed resources means lower rates of economic growth-
and lower future living standards for society as a whole.
Again, no one avoids all the harmful effects of inflation. Rapid increases in the general
price level redistribute real incomes and distort the pattern of production and resource
allocation. In such circumstances, the growth process tends to be erratic and
unpredictable. This is why the government steps in and reduces the size of these
fluctuations, so the harmful effects will be minimised, and economic growth can proceed
in a smooth, orderly fashion.
Governments attempt to stabilise the economy by using both fiscal and monetary
policies. Governments try to avoid major fluctuations in economic activity by using a mix
of policies. Monetary policy tends operate as the main stabilisation policy. Higher interest
rates can curb excessive growth, while low interest rates tend to encourage spending and
business investment lifting the growth rate. If the government wanted to slow down the
level of economic activity, it could do so by tightening monetary policy. It would put
upward strain on interest rates, and reduce the money supply. If the government wanted
to increase the level of economic activity, it could do so by loosening monetary policy. It
would put downward pressure on interest rates, and increase the money supply.
Fiscal policy also plays a very important role through the direct effect of the
government’s overall level of spending, taxing and borrowing in a year. An expansionary
fiscal policy aims to increase the level of economic activity. With this, the government
might reduce taxation revenue or boost government expenditure. A contractionary fiscal
policy is implemented to decrease the level of economic activity. The government would
be planning to increase taxation revenue or cut government expenditure.

One of the most susceptible aspects of government intervention in the economy is how it
deals with the impact of economic activity on the environment. Environmental impacts
have become a more important issue for governments in recent years, with increasing
understanding of the long term environmental impacts of economic development in
industries such as mining, energy, forestry and construction. The industrialised and
developing worlds are rapidly depleting the world’s stocks of non-renewable resources.
The use of energy resources such as coal and oil lends to huge emissions of carbon
dioxide, which is a gas associated with global warming. Pollution through industrial
output, toxic waste, chemical spills and increased sewerage threatens, one of the most
valuable resources of all- water. As a result, the government can contribute towards
sustainable energy use by supporting energy sources and giving incentives to reduce the
use of fossil fuels.

Government policies influence environmental management by discouraging


environmentally harmful activities and providing incentives for firms and individuals to
act in an environmentally responsible manner.
A ban on the production of a particular good or services is the most extreme action a
government takes to achieve improved environmental management. For example since
2002 it has been illegal to sell leaded petrol in Australia, and motorists who formerly used
leaded petrol must use lead replacement petrol instead, Banning a product will naturally
eliminate all negative consequences associated with its use. However, it can also impose
severe costs on firms and individuals. Consequently governments only consider this
option if a particular product is causing severe environmental damage or where a suitable
substitute product exists.
A slightly less extreme measure governments can take to discourage production of a
particular good or service is to levy a tax on its use. For example, the Australian
government imposes a tax on petrol of 38 cents per litre to encourage Australians to adopt
more ecologically sustainable energy resources. These taxes on petrol forces the owners
of motor vehicles to pay some of the costs associated with air pollution and road
maintenance.
Governments can also introduce policies to encourage firms and individuals to use more
environmentally friendly goods and services. Government funding is also used to hasten
the introduction of new technologies that have environmental benefits but high start up
costs. For example, in 2004 the Australian government contributed $500 million to
establish a Low Emissions Technology Development Fund to encourage the development
of fuel sources such as solar and wind power.
In recent years, the Australian government has sought market based solutions to
environmental problems. In other words, it has attempted to use taxes and subsidies,
rather than outright bans or the provision of public goods, to achieve environmental
objectives. However, just as most environmental problems take years, or even decades to
emerge most government environmental policies take a long time to have a significant
impact. As a result, governments are often tempted to ignore environmental concerns to
pursue other short term economic objectives.

In conclusion, the main point in this essay is that markets are not perfect. They are very
effective in determining what the economy produces and how production is organised.
No other system of economic management has produced the level of prosperity,
innovation and satisfaction of material wants. But markets are not sufficient. They reflect
on private economic interests, and not broader social interests. Australia lives in a society,
not just an economy. Australia needs the government, not make markets function but to
sometimes adjust market outcomes when they are not satisfactory. The challenge is to
find the right balance. Too much government intervention may stifle innovation,
efficiency and growth. Too little may leave Australia exposed to instability, inequality,
environmental destruction and a lack of basic community facilities.