Download Why government intervention in economy is necessary

The People ­ Thursday
Date: 09.06.2016
Page 11
Article size: 201 cm2
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AVE: 56369.33
Why government intervention in economy is necessary
In a free market economy, the basic (education, health, security) and ex­
resource allocation decisions (What ternalities (social benefits and social
to produce? How to produce? and for costs).
Whom to produce?) are determined by
the market forces of demand and sup­
ply. The price mechanism therefore
is seen as the "invisible hand" which
leads to the efficient allocation of re­
sources.
government, therefore, relate to the as­
pect of the fiscal and monetary policies
Creation of a framework for rules aimed at maintaining a high and even
and regulations remains a crucial role level of the economic activities.
for the government in the economy.
Competition in various sectors
This is to ensure that there is "fair play" of the economy is important. This is
among all the players or agents in the because where competition exists
economy i.e. consumers and the pro­ we get a wide variety of goods and
However, there has been a gradual ducers.
The creation and the enforcement
shift from capitalist form of economies,
where government plays no part on of such rules and regulations is only
resource allocation, to mixed econo­ possible through Government Au­
mies where government has a greater thority such as KEBS, CAK, ERC, IRA
involvement in resource allocation. and CMA to regulate their respective
There are several reasons why the gov­ industries. These rules and regula­
ernment intervenes in the economy. tions usually relate to, among others,
Market failure is one of the main property rights, standards of hygiene,
causes of government involvement quality standards, working conditions,
in economic activities. This refers to contracts and restrictive practices.
a situation whereby the price mecha­ Through this, the government ensures
nism would either produce the wrong that there is soberness among the vari­
amounts of certain goods and services ous players in the industry thus mini­
or fail to allocate sufficient resources for mising conflicts.
One major objective of the govern­
the production of certain other goods.
This is usually the case of the public ment is to promote the general eco­
goods (street lights etc) merit goods
the time. The stabilisation functions of
nomic welfare of citizens. A means to­
services. In addition, competition
results in better quality products at
fair prices. The evolution of the free
market economy more often results
in monopolies and oligopolies which
have the effect of undermining effi­
cient allocation of resources among
the competing uses.
The government, therefore, finds it
necessary to intervene in the economy
to maintain competition by, for exam­
ple, passing anti­monopoly legislation
which seeks to limit any supplier from
developing the monopoly control of
any particular product or service.
—1he writer is an Economics lec­
turer at Catholic University of East
AJrica(CUEA).
wards this end is to ensure that there is
equitable distribution of incomes and
wealth. Many developing countries
experience serious income distribution
disparities with their national incomes
being concentrated in the hands of a
small proportion of the population.
The government can achieve fairness
in the distribution of income through
a system of taxation which bears more
heavily on the rich. After raising the
revenue from taxation, the govern­
ment can improve the welfare of the
less privileged through provision of
education, affordable medical care and
better housing.
Stabilisation of the economy still re­
mains one of the most crucial functions
of the government. Modern economies
are subject to much instability such as
unemployment, recession, inflation,
balance of payment deficits, exchange
rate fluctuations, among others. The
government through the use of fis­
cal and monetary policies has the re­
sponsibly of ensuring that the levels of
economic activities remain stable all
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