INTRODUCTION

In the 18^th and 19^th centuries, famous economists such as David Ricardo and Adam Smith agreed to the existence of an invisible force within the market. Markets only relied on deciding prices for resource allocations and meeting the demands for rations. Their decisions were usually based on self-interest only. They did not require any active government interventions beyond the provision of law and order.

Gradually with the passage of time, many complications started forming while handling smooth functioning of markets. The major problem was of scarcity of resources which were in high demand. To eliminate this issue, the economists and other professionals emphasized on the unregulated interactions between the financial institutions and government (Pettinger, 2012).

Economists believe that there is a very limited role of government in economic affairs. In any market economy, most of the economic decisions are made by the individual buyers and sellers, but not by the state. Residents of the country and political leaders do not agree to this statement. According to their view, the government interventions increase when the market functions have expanded. In such situations, the government is expected to perform a large variety of activities.

There are many advantages of government intervention such as even income distribution, no social injustice, secured public goods and services, property rights and welfare opportunities for those who cannot afford. Whereas, according to some economists the government intervention may also result in few disadvantages. Unnecessary goods may be produced as the government may not be much well aware about the needs and wants of their people. There may be social gap between the rich and poor because of uneven income distributions (Low, Nend, 2011).

HOW GOVERNMENT CAN MAKE MARKETS TO FUNCTION BETTER

Most markets function smoothly because of the effectiveness of unregulated markets and Adam Smith’s unseen force. There are numerous highly differentiated goods and services which are available for the consumers. Financial institutions such as firms and banks are linked together with a highly sophisticated and complicated system of investments, distribution and production chains.

There are four different types of government institutions which are operating in almost every country to facilitate their people. Firstly, there are market-enabling institutions which help economic agents to manage conflicts, to secure property rights and to help in recognizing their own rights and duties towards customers. They help in sticking to long term contracts and avoid any kind of disputes. Secondly, the market-regulating institutions keep an eye over market players who are misusing their market power and ensure a healthy competition among firms to control any firm from being the monopolist. They also improve the market prices and make sure that they reflect the correct costs and benefits for both the buyer and seller. Thirdly, the market-stabilizing institutions are the independent banks working in the economy. The governments’ central bank will serves as the lender of last resort so it may avoid banking crisis in difficult situations. Another role for these institutions is to stabilize the state’s contribution towards the macroeconomic activities (Pettinger, 2012). Lastly, the market legitimizing institutions boost up and sustain the public support for market economies. They sort out and reorganize income and provide social insurances. They are also a vital source of social stability in the economy. They encourage firms for long-term developments as they want to facilitate economic development for their residents.