Theprinciple that states that governments can influence the outcomes ofa market or markets is one of the most important economic principlesthat I learnt from the course. From the principle, I realized thatthere are two reasons that compel governments to intervene in aneconomy: the enhancement of equity and promotion of efficiency. Bothreasons target to either change the decisions of the economic pie orenlarge the economic pie thereby enabling consumers to accessadditional markets. Reduced government involvement into the economyand its market paves way for market failure since the distribution ofresources in uncontrolled markets is inefficient.
Theprinciple had a significant impact on my understanding of themacroeconomic environment with particular regard on the causes ofmarket failure. From the principle, I learnt that there are two majorcauses of market failure: externalities and market power. In themacroeconomic context, an example of an externality may include thefailure of a chemical company to regulate the emission of itspollutants into the environment. In such a case, the government playsthe role of imposing environmental regulations that compels suchcompanies to control their emissions. Monopolists enjoy market powerdue to the absence of market competition. In such a case, governmentintervention is imperative as a measure of controlling the marketprices thereby averting incidences of market failure.
Thetwo examples of the causes of market failure are some of theapplications of the principle to the macroeconomic context. From theexamples, it is evident that the failure of a market is imminent inthe event that the responsible government is unable to control theemissions or market prices(Bourchtein, 2011).
Bourchtein,V. (2011). ThePrinciples of Economics Textbook: An Analysis of Its Past, Present &Future(Doctoral dissertation, Stern School of Business New York).