Question

please answer the question in 300 words

Do you think markets are a good way to organize economic activity?Provide two real- world situations where government intervention in a market economy might improve the economy’s performance.

Answer 1

Yes. Markets are good way to organise the economic activity because invisible hand leads Markets to desirable outcomes. Countries are even classified as open and closed market economy. The World Trade organisation GATT agreements regulate the market policies of Countries. Market failure is due to market power and externality. The government can intervene market failure through regulation, taxation, and subsidies. The intervention by government often focuses on maximizing social-welfare, stabilise during fluctuations and to boost the economic activity.

Real world Situations

1. Import Subsidy: In India, the government supports farmers by providing import subsidy for fertilisers. This move though cost the government huge sum, it also encourages farmers to produce agricultural goods. The method subsidy calculation is through Import Parity Pricing which exposes fertilier companies to world competition. A study by Sharma and Thaker (2009) has given the following results. There is a fair degree of equity in distribution of fertilizer subsidy among farm sizes. A reduction in fertilizer subsidy is, therefore, likely to have adverse impact on farm production and income of small and marginal farmers as they do not benefit from higher output prices but do benefit from lower input prices.

2. Minimmum Support Price: Another form of market intervention by Government is through Minimmum Support Price (MSP) for agricultural products. It enables remunerative price to farmers and affordable price to consumers. However, this powerful tool requires perfect knowledge transfered to farmers. In absence of which the objective of MSP will not fulfilled. Aditya et al., (2017) has conducted a study and have found similar results.

Sharma, Vijay Paul & Thaker, Hrima, 2009. "Fertilizer Subsidy in India: Who are the Beneficiaries?".

Aditya et a. 2017. Awareness about Minimum Support Price and Its Impact on Diversification Decision of Farmers in India