The Need for Government Involvement and Regulation in a Market Economy

2330 Words9 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. These systemically important institutions, if default occurs, could threaten the economic system of America. These industries, including energy and banking require extensive government oversight in addition to intervention if needed. In many instances, little government involvement is beneficial to the market economy as it allows competitive forces to dictate operating results. The lack of government intervention, the private sector can handle many of the problems that occur within the industry in a process known as "creative destruction." If a large company defaults, then other private enterprise can better serve the market with products that are demanded. This occurs primarily through a lack of government intervention within the economy. For one, government involvement occasionally undermines the competitive climate of industry. Capitalism is predicated on innovation and profit motives to drive business results from a private perspective. Those who innovate should therefore be rewarded accordingly. 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 to insure
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