In previous lessons, we have learned that there are three main types of economic systems. They are:
– Command economy
– Market economy
– Mixed economy
Now, we have to understand that most, if not all, countries today are mixed economies. That means the economies have the characteristics of both command and market economies. A country could be called as a capitalistic country, when it is more towards the market system rather than command system.
One thing is clear when we look at the economies today. That is, the government does influence the market(the producers and consumers). Therefore, let us look at how the government influences the private producers.
Fiscal Policy Interventions – Tax and Subsidies
Fiscal policy can be used to alter the level of demand for different products and also the pattern of demand within the economy.
– Government may take tax on producers for several reasons. When the tax is imposed, the supply curve shifts to the left, reducing the supply. In previous lessons we have looked at the reasons why tax is imposed by the government. Tax is one way of how the government influences the economy.
– Government can give subsidies to the producers to encourage them to produce merit goods or because those firms could be producing goods that are necessities. remember that a subsidy causes an increase in market supply and leads to a lower equilibrium price.
– Tax relief: The government may offer financial assistance such as tax credits for business investment in research and development. Or a reduction in corporation tax (a tax on company profits) designed to promote new capital investment and extra employment.
Legislation and Regulation
Another way in which the government can influence the private producers is, through rules and regulations. The economies usually operate with a huge and growing amount of regulations. For example:
Regulation may be used to introduce fresh competition into a market – for example breaking up the existing monopoly power of a service provider. A good example of this is allowing a second telecommunication service provider(Ooredoo Maldived) in Maldives. This is known as market liberalisation.
Next: Do a quiz on this unit