The Role of Government in a Market Economy

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: Government Fiscal Policies: Goals and Influence

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
Your next lesson will play in 10 seconds
  • 0:00 Definition of Market Economy
  • 0:45 Role of Government
  • 1:10 Environmental Protection
  • 2:00 Consumer Rights &…
  • 3:27 Public Service and Protection
  • 4:05 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Speed Speed

Recommended Lessons and Courses for You

Lesson Transcript
Instructor: Christine Serva

Christine has an M.A. in American Studies. She is an instructional designer, educator, and writer with a particular interest in the social sciences and American studies.

In this lesson, you'll examine the role of government in a market economy. You'll learn what kinds of activities may require government interaction, such as those related to consumer and property rights.

Definition of Market Economy

A market economy is a system in which the supply and demand for goods and services plays a primary role in a competitive marketplace. In your own life, you can see the market economy at work when you look at prices. For example, when you go to buy a banana, the price has a lot to do with how many people want to buy bananas, and how many bananas are available.

In this lesson, we'll consider what role the government can play in this form of economy. Note that there is a great deal of disagreement among politicians about just how much influence government should have in market economies. We'll use this lesson to cover the basic concepts, not the detailed controversies.

Role of Government

In a market economy, individuals and private companies play more of a central role than the government. This means that the price of bananas may be influenced by certain government policies but is mainly driven by consumers and companies going about their business. So, when does the government get involved in a market economy? Let's imagine for a moment that the government played no role at all. What risky things might happen that would be really bad news for most people?

Environmental Protection

Let's take a look at a hypothetical business, the Yellow Fruit Company, which grows and distributes bananas. We'll call its competitor the Curved Fruit Company. Imagine that the Yellow Fruit Company has found a way to grow bananas more quickly and efficiently but also increases the effects of pollution. To compete with the Yellow Fruit Company, the Curved Fruit Company has to use the same new process, which leads to an increase in pollution. If left to the market alone, these two companies would double the number of additional pollutants to the environment. While the new method is a more economically efficient way to grow bananas, nature and people will suffer. At this point, the government plays a role in the market economy by setting rules about environmental pollution. That way, the Yellow Fruit Company and the Curved Fruit Company both have to abide by the rules while competing on equal terms.

Consumer Rights

A market economy with no government intervention also has the potential to trample on some of the rights we usually take for granted. For instance, have you ever seen the price of gas suddenly shoot up sky-high during a natural disaster? At times like these, certain businesses take advantage of an emergency situation by price gouging, or Inflating the price of a needed good to turn a profit. Not all price increases are considered price gouging, but when the issue does arise, the government may step in to protect consumers. In addition, when one company grows so large that it controls an entire market for a product or service, the government may also take steps to prevent a monopoly, which is when one company controls the supply (and thus profit) of a particular type of product or service, and restore competition back to the industry.

To unlock this lesson you must be a Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use

Become a member and start learning now.
Become a Member  Back
What teachers are saying about
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account