Question

There are many schools of thought that exist on what the role of government should be in our economy. Please offer your vision of what that role should be. List and explain any advantages/disadvantages that you see by the government getting involved in the economy. Also, should price discrimination be illegal? Why or why not?

Answer 1

According to me role of the government, in the narrowest sense, in the economy is:

To help correct market failures, or situations where private markets cannot maximize the value that they could create for society. This includes providing public goods, internalizing externalities, and enforcing competition. Many societies have accepted a broader role of government in a capitalist economy.

While consumers and producers make most decisions that mold the economy, government activities have a powerful effect on the U.S. economy.

Perhaps most importantly, the federal government guides the overall pace of economic activity, attempting to maintain steady growth, high levels of employment, and price stability. By adjusting spending and tax rates (fiscal policy) or managing the money supply and controlling the use of credit (monetary policy), it can slow down or speed up the economy's rate of growth -- in the process, affecting the level of prices and employment.

When the danger of recession appeared most serious, government sought to strengthen the economy by spending heavily itself or cutting taxes so that consumers would spend more, and by fostering rapid growth in the money supply, which also encouraged more spending.

Example: In the 1970s, major price increases, particularly for energy, created a strong fear of inflation -- increases in the overall level of prices. As a result, government leaders came to concentrate more on controlling inflation than on combating recession by limiting spending, resisting tax cuts, and reining in growth in the money supply.

Advantages/Disadvantages of government getting involved in the economy:

Advantages:

• Greater equality – redistribute income and wealth to improve equality of opportunity and equality of outcome.
• Market failure – Markets fail to take into account externalities and are likely to under-produce public/merit goods. For example, governments can subsidise or provide goods with positive externalities.
• Macroeconomic intervention. – intervention to overcome prolonged recessions and reduce unemployment.

Disadvantages:

• Governments liable to make the wrong decisions – influenced by political pressure groups, they spend on inefficient projects which lead to an inefficient outcome.
• Personal freedom. Government intervention is taking away individuals decision on how to spend and act. Economic intervention takes some personal freedom away.
• The market is best at deciding how and when to produce.

Is price discrimination legal or illegal? Why or why not?

Price discrimination is the practice of charging different persons different prices for the same goods or services. Price discrimination is made illegal under the Sherman Antitrust Act. 15 U.S.C. §2, the Clayton Act, 15 U.S.C. §13, and by the Robinson-Patman Act, 15 U.S.C. §§13-13b, 21a, when engaged in for the purpose of lessening competition, such as tying the lower prices to the purchase of other goods or services.

If different prices are charged to different customers for a good faith reason, such as a an effort by the seller to meet the competitor's price or a change in market conditions, it is not illegal price discrimination. Merely charging different prices to different customers is not illegal, when there is no intent to harm competitors.