RAJ KRISHNA AND KIRTI KRISHNA
CHANAKYA NATIONAL LAW UNIVERSITY, PATNA & HINDU COLLEGE, DELHI
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I. INTRODUCTION
Market refers to the entire area over which the buyers and sellers of a commodity come in contact with each other in order to buy and sell it respectively. The contact may not necessarily connote their physical presence but just a strong network through which they are able to carry the exchange efficiently. One of the most vital conditions for a market to exist is some degree of competition among buyers and sellers. It is because of this rivalry that a market is able to survive.
However, sometimes this competition becomes way more severe leading to either the situation of excess demand or excess supply; hence disturbing the market equilibrium. Precisely, market equilibrium refers to that situation where the quantity demanded of a good by the buyers is same as the quantity supplied of that good by the sellers at a particular price in the market during a given period of time. The measure of good exchanged at this equilibrium point is called as equilibrium quantity whereas the price existing here is referred as equilibrium price.1
Since the main aim of the consumers is utility maximization, therefore they tend to buy more of a good at lesser prices. Hence, there exist an inverse relation between the price and quantity demanded of that good. On the other hand, the prime motive of the producers is profit maximization and so they are willing to supply more units of a good only at greater prices; thus suggesting a direct relation.2 Given that the consumers and producers have different motives responsible for their respective actions, there occasionally arise circumstances which might lead to market failure and for this reason the government intervenes in the market from time to time.
II. CLASSICAL THEORY
Government control over the market is a recent phenomenon. It is because earlier the world of economics was dominated by Classical Economists. Classical economists like Adam Smith, J.S. Say and others advocated the doctrine of laissez faire which meant non- intervention of the government in economic matters. Adam Smith introduced the concept of the invisible hand, which referred to the free functioning of the price (market) system in the absence of government intervention.3
In the 19th century, the western capitalist economics achieved spectacular growth by following the policy of laissez-faire. The doctrine of laissez faire, which meant ‘leave us alone’, held that government should interfere as little as possible in economic affairs and leave economic decisions to the interplay of supply and demand in the market place. However, the great depression of 1929 (which lasted for 4 years) shattered the economies of U.S.A. and other western industrialized countries and forced them to partially abandon the doctrine of laissez faire.4
III. ROLE OF GOVERNMENT IN CONTROLLING ECONOMY
Today the government of any country intercedes in the market at the time of crisis through its’ budgetary and economic policies. Primarily, it attempts to avoid the extremities during market imbalances by means of the current budget adopted by it. In case, the market price is determined above the equilibrium price there comes up a situation of excess supply which signals that the amount of goods available in the market for sale is exceeding its’ current demand that can also be termed as a shortage of aggregate demand. This happened because the market price is set up above the price that the average number of consumers can afford to pay; causing deflation which implies a collapse in the general price level. In such a circumstance government adopts a policy of deficit budget as it would cure deflation by raising the level of aggregate demand. Hence, the excess of goods in the market is again demanded by consumers. While if the market price is determined below the equilibrium price then it leads to a case of excess demand because the purchasing power in the hands of the consumer has become greater than what the market is offering for sale. Since, excess demand leads to inflationary conditions; therefore now the government would adopt the policy of surplus budget in order to reduce the level of aggregate demand in the economy.5
The government can either intervene directly in the determination of market price by imposing ceiling and floor prices or indirectly through the imposition of taxes and subsidies. Ceiling price fixed up by the government is the maximum cost which a producer can charge from the consumer for its’ good. Since its’ prime motive is to protect the interest of the consumers, so it is imposed only on the necessities of life. Similarly, there may also occur cases where the producers incur losses for not getting a proper price of their product. Hence, in this situation the government imposes floor price i.e., it determines a minimum price below which the consumers are not allowed to buy that particular good. Such a move is implemented only when the market price determined on the basis of forces of demand and supply seem unfair for the producer. This is generally applicable in the case of the agricultural sector.6
Apart from managing the extreme situations of inflation and deflation, the government also tends to reduce the income inequality prevailing in the economy through imposition of taxes and subsidies on the income of people in accordance with their economic condition.
Besides, it reallocates the resources in the economy in order to encourage the production of desirable goods that not only raises the level of national income but also contributes to social welfare. On the other side, it also discourages the production of objectionable goods by imposing heavy tariffs over its’ production. Thus, it aims at balanced regional development. Therefore, it can be said that Government plays a very important role in managing the market of any country.
THE END
1 Surbhi Arora, Economics for Law Students, Central Law Publications, Reprint, 2014. ↩
2 Ibid↩
3 Ibid 2↩
4 http://www.economicsdiscussion.net/government/role-of-the-government-in-a-market-economy-economics/26174 , visited on 23rd July, 2018↩
5 Sandeep Garg, Introductory Microeconomics for 12, Dhanpat Rai Publications. ↩
6 Ibid 2↩
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