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Day 25 – Q 1. Even though, there is a broad agreement on the numerous benefits of having a free market economy, government intervention is essential in certain fields/ sectors.  Elucidate. 

  • IASbaba
  • July 8, 2020
  • 0
GS 3, Indian Economy, TLP-UPSC Mains Answer Writing
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1. Even though, there is a broad agreement on the numerous benefits of having a free market economy, government intervention is essential in certain fields/ sectors.  Elucidate. 

हालांकि, मुक्त बाजार अर्थव्यवस्था होने के कई लाभों पर एक व्यापक समझौता है, कुछ क्षेत्रों / क्षेत्रों में सरकार का हस्तक्षेप आवश्यक है। स्पष्ट करें।

Demand of the question:

It expects student write about free market economy and its benefits in short. It also expects students to analyse both aspects of whether  government intervention in certain fields/sector keeps the interest of those fields/sectors or not.

Introduction:

The free market economy is an economic system based on supply and demand with little or no government control. Free markets are characterized by a spontaneous and decentralized order of arrangements through which individuals make economic decisions.

Body:

Free Market Economy:

  • In a free market economy, firms and households act in self-interest to determine how resources get allocated, what goods get produced and who buys the goods.
  • Ideally, there is no government intervention in a free market economy (“laissez-faire“). However, no truly free market economy exists in the world.
  • Post-1991 India has adopted free market policies. However government frequently intervenes through mechanisms like social sector schemes, regulatory mechanisms to ensure equitable economic growth.

Benefits of free market economy:

  • The producers are more incentivized to produce their best goods and services due to the feature of the profit motive and the ability to hold private property.
  • Since all resources and factors of production are under private ownership they are used in the most productive manner. This results in optimum utilization of resources.
  • Consumers also benefit in a free market economy. Firstly they have the freedom to choose whichever products or services they wish to buy. Also, the competition is high and the producers are motivated to make their best products in large quantities at reasonable prices.
  • Free market economy also promotes fundamental rights of freedom and choice for both the consumer and the producers.

Despite the broad agreement on the above mentioned benefits of free market economy government intervention is essential in certain fields/sectors due to following reasons:

  • One disadvantage of a free market economy is that some producers are driven exclusively by their profit motives. Such an objective should not be prioritized over the needs of workers and consumers. 
  • Put simply, a Construction company should never compromise the safety of its workers or disregard environmental standards and ethical conduct just so it can make supernormal profits. Hence, government intervention is necessary to protect the rights of worker, citizens and to protect environment through laws and regulations. Recently the Maharashtra government enacted “The Real Estate Regulatory Authority Act (RERA)” which  will review and issue resolutions on a regular basis regarding real estate sector.
  • Unethical behaviour: In 2010, the Deepwater Horizon oil spill, which is one of the biggest environmental disasters in the United States, happened because the company used substandard cement and other cost-reducing measures. In this regard Government of India has already enacted acts like, Environment (Protection) Act, 1986 etc.
  • Market failures: At times, a free market economy can spin out of control, causing dire consequences. Good examples of market failure include the Great Depression of the 1930s and the real estate market crash that happened in 2008. Market failures can lead to devastating outcomes such as unemployment, homelessness, and lost income.
  • Due to the fiercely competitive nature of a free market economy, businesses will not care for the disadvantaged like unorganised sector workers. This leads to higher income inequality. We can observe this in the market  where in a big coffee shop a person can buy a coffee for nearly  250 Rs. but at the same time a small tea/coffee vendor can sell a  coffee for nearly 15 Rs..
  • With respect to agricultural sector government intervention is in form of subsides, interest free loan (NABARD). i.e. Government intervenes in these sectors to reduce the hardships of farmer
  • Also, there are certain specific fields where governments intervenes not because of necessity but because of responsibility i.e. in the fields of Nuclear energy (Atomic Energy Regulatory Board -AERB), Defence (DRDO) etc.

But the coin has other side too:

  • Wide scale government intervention may result in market being toy in the hands of Politicians.
  • Lack of incentives to improve the quality and performance may result in stagnant growth trajectory of certain sectors. Recently to rejuvenate BSNL government needed to announce 70000 Cr. bailout package.

Conclusion:

Our constitution is based on the principle of just, equal society-economy. Hence, it becomes imperative for the government to intervene in certain sector/fields of free market economy when it seems necessary but it should not lead to politicization of those sectors so that India can achieve its target to be a 5 trillion $ economy by 2024.

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