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There is no such thing as a successful laissez-faire economy; every successful national economy is supported by a powerful and effective state.' Explain the main functions and limitations of state action in today's economics.

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Introduction

There is no such thing as a successful laissez-faire economy; every successful national economy is supported by a powerful and effective state.' Explain the main functions and limitations of state action in today's economics. 'Laissez-faire' is a term which "has been used as convenient shorthand for the general prescriptions of the classical economists and in particular for a belief in the efficacy of a free market economy. In a more precise from it has been regarded as synonymous with free trade." (Taylor. A 1972 P11) Although many classical economists believed that the free market economy was the best economic system as a nation economic system, in today's economics, an idea of successful national economy is supported by a powerful and effective state. In this essay, the economic system's definition and the characteristics of the three types of economic system will be outlined in turn firstly. It is also provides the fully explanation of the main functions and limitations of government intervention in economy. Finally, the summary that how could government operate well in today's economy will also be concluded. Economic system is "a system for coordinating the actions of all the people in a society in order to decide what to produce, how to produce and for whom to produce." (Economics Lecture Handout, 7th Oct 2004) There are two entire different models of economic system. At the one extreme lies the completely command economy, at the other extreme lies the completely free-market economy. ...read more.

Middle

However, free-market economy also has its relative disadvantages which in comparison with the command economy. Sometimes market could not allocate resources efficiently, and even Market Failures. The reasons will be mentioned as following: Public goods such as defence and street lighting will not be provided by the free-market system. Merit goods such as health and education would only be provided for those who willing and able to pay. Demerit goods such as firearms, narcotics and pornography will be freely available in the free-market economy. Lack of social protection for vulnerable group in society and the potential large disparity between the living standard of the rich and the poor will be happened in a free-market economy. Competition may break down especially in industries with very significant economies of scale. "Macroeconomic instability which means market economies tends to fluctuate between booms and recessions." (Economics Lecture Handout, 7th Oct 2004) After explored the disadvantages of free-market economy, it is clear that in a real world economy, mixed economy which government uses its functions to intervene in the market will make a successful national economy. Because of the state could use its functions to solve the problems which might happen in the 'laissez-faire' economy. First of all, governments implement a judicial system to protect property rights. Governments determine the legal framework that sets the basic rules for the ownership of property. This is the primary function of government. ...read more.

Conclusion

For example, producer will produce more amounts of one goods by cutting the quality if the government set award to the one who produced more. Secondly, "The government might enforce its plans even if they were unpopular." (Sloman .J 2004 P23) Therefore, intervention may be designed to obtain shot-term political advantages, not to make the economy work more efficiently. The decision-makers' personal needs may not be always wholly absent from their minds when considering the best policies to adopt. Lastly, due to decision-making is centralized, highly inflexible in respond to change will also be happened. "Regulation, tax rates and expenditure policies are not easily changed. However, market conditions change often, sometimes rapidly." (Lipsey .R & Harbury .C 1992 P236) For example, shortages and surpluses may result mainly caused by the lack of price signals to use resources efficiently. To sum up, as the state intervenes in the mixed economy, it could take an overall view of the economy. Therefore, the governments should collect up-to-date and accurate information, then conduct an appropriate and accuracy input-output analysis so that the state could produce a good distribution of resource investment to achieve high growth rate; could plan the allocation of labour carefully to largely avoid unemployment; could distribute the national income more equally; could take externalities into account and able to predicate these effects and chose to take them into account. With all these conditions achieved, the state would be able to give a powerful and effective support to the national economy, naturally, a successful national economy will be achieved. ...read more.

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