Long Term Investment Decisions

Explain why government regulation is or is not needed, citing the major reasons for government involvement in a market economy. Provide support for your explanation.

The economic theory of welfare of optimization stands from Adam Smith, and although variously extended and developed, still provides the foundation for economic policy analysis (Just et. Al… 1985). The theory holds that a system of perfectly competitive markets (in which there is freedom of entry and exit in all markets) of all sectors are price-takers and for whom private costs and benefits are identical with social costs and benefits capable of generating a socially optimal allocation of resources to the production of goods and services for the population, such that no one person can be made better off without making at least one other person worst of (they pareto welfare criterion). There should be government regulation/ intervention in a free market economy to some extent. Market cannot exist without a government to protect property rights, enforce contracts and resolve disputes all of which is intervention. This will benefit the economy in some meaningful ways. Primarily, government regulations permit business to remain in the private hands while removing some of the worst abuses of pure capitalism. Extremely wealthy people or companies have the ability to control large section of the economy because of shrewd business dealings. Only government involvement can fix that.

When the producer like De Beers has a monopoly, the consumer is no longer sovereign, prices are not set by supply and demand, and therefore the system cannot function effectively. As a mixed economy there is competition between companies but we need government regulations to ensure that these types of monopolies do not exist. A safe amount of government intervention will result in higher incomes, production and employment, which will then lead to expansion. Limited government involvement prevents crisis such as inflation,...