Government Involvement in a Market Economy

2008 Words8 Pages
Explain why government regulation is needed, citing the major reasons for government involvement in a market economy.
Government involvement in a market economy is necessary only when the industry is systemically important to the overall functioning of the economy. In many instances, little government involvement is beneficial to the market economy as it allows competitive forces to dictate operating results. For one, government involvement occasionally undermines the competitive climate of industry. Capitalism is predicated on innovation and profit motives to drive business results. With government intervention, this incentive is dramatically abated as firms are reluctant to innovate. However, in the case of systemically important institutions, government oversight is indeed needed. The most recent example occurred with the financial crisis of 2008. In this particular instance, government intervention was needed to insure the stability and confidence within the market economy. As confidence in the market declines, so too does the prevalence of capital. Overly pessimistic views of a market economy can cripple much need liquidity in the system. As a result, government involvement is needed to instill confidence within the overall system. In regards to the banking industry example, capital requirements have been implemented by government to insure the safety and viability of the market economy as a whole.
Capital Requirement is by the most basic definition the amount of
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