Role of Government
The government provides the legal framework and the services needed for a market economy to operate effectively. The legal framework sets the legal status of business enterprises, ensures the rights of private ownership, and allows the making and enforcement of contracts. Government also establishes the legal "rules of the game" that control relationships among business, resource suppliers, and consumers. Discrete units of government referee economic relationships, seek out foul play, and impose penalties.
Government intervention is presumed to improve the allocation of resources. By supplying a medium of exchange, ensuring product quality, defining ownership rights, and enforcing contracts, the government increases the volume and safety of exchange. This widens the market and fosters greater specialization in the use of property and human resources. Such specialization promotes a more efficient allocation of resources.
The government improves the operation of a market system by maintaining competition. Competition is the basic regulatory mechanism in the market system. It is the forcer that subjects producers and resource suppliers to the dictates of consumer sovereignty. With competition, buyers are the bosses, the market is their agent, and businesses are their servants. On the other hand, if a monopoly takes place, the monopolist is able to charge a higher-than-competitive price. Producer sovereignty then supplants consumer sovereignty. In the United States, the government has attempted to control monopoly through regulations and through antitrust. However, a few natural monopolies exist; for instance, some firms that provide local electricity, telephone, and transportation services ...