Understanding How Prices Are Determined in a Market: Research Proposal

Introduction

Background Information

In any market, prices are determined by various factors especially the forces of demand and supply as well as the governmental interventions. According to Mansfield and Yohe (2004), a market is an institution where the prices of the services offered and goods sold are determined to enable the buyers and sellers exchange goods and services. In a market, the economic resources are scarce implying the need for the system to ration both the resources and the products. To facilitate this rationing, a government in which the market operates provides different incentives as well as fundamental requirements that are imperative like property rights and contract enforcement that impact on the trade. According to Ajefu and Barde (2015), unless the contracts are enforced by the government, people would not engage in contracts due to imminent frauds. Therefore, it has been established that a market cannot function without these regulations. However, this has brought questions regarding the free market notion which require markets to operate freely without external interventions from various organizations including the government. According to Mansfield and Yohe (2004), a free market system ensures that the forces of demand and supply determine prices of goods and services hence maintaining an equilibrium. However, there is a need to have an efficient allocation of resources to ensure that a perfect market is achieved which calls the role of the government. Le Grand et al. (2008) argued that when a government intervenes a perfect market, the efficiency is lost. Therefore, the question of the role of government in free markets has become a question of concern in modern economics.

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Significance of the Study

Global financial crises throughout the course of time have resulted in stakeholder concerns regarding the measures to maintain proper economics that support growth and development. Various challenges have been faced by free markets globally where even democratic states that advocate for capitalism have been concerned with their future hence a concern in the market operations (Mansfield & Yohe, 2004). In the recent global financial crises, governments have resulted to expand their states with the nationalization of the financial institutions taking a center stage with the aim of putting up some measures to coordinate important economic functions for the wellbeing of GDP (Ajefu & Barde, 2015). In the western democracies, the recent expansion intends to be temporal with the re-evaluation of the public spending priorities including the policies that can be enacted to facilitate a better financial operation to avoid instances of crisis again. However, many stakeholders, traders, scholars, economists, and policymakers are concerned with the impact of such actions on the free market and its overall consequence in the economy. Therefore, this research seeks to deconstruct these issues and evaluate how the intervention of a government in free markets impacts trade and economy at large. The study will investigate and recommend the measures that should be taken by different stakeholders to ensure perfect trade that facilitates economic development. In this regard, this study is imperative as it seeks to address the major concern of the business world regarding governmental intervention and its consequences to the development of the sector.

Research Problem

One of the major concerns in economics is the extent to which governments should intervene in the economy. Specifically, the question regarding whether a government should intervene and regulate a free market for its efficiency has been a major concern in democratic states that emphasize on capitalism. Free markets have been arguing that the intervention of markets by governments should be strictly limited (Namini, 2015). Such economists point of view suggests that a governmental intervention leads to an inefficient allocation of resources that are imperative in ensuring the success of market trade. However, others have still argued that there is a strong case regarding intervention by the government in various fields including externalities, monopoly power, and public goods. The arguments for government interventions have suggested that there is greater equality which involves the redistribution of income and wealth to improve the equality of opportunity and outcome (Hepburn, 2010). Besides, they argue that an intervention can overcome possible prolonged recessions thereby reducing unemployment. However, findings have also suggested that intervention by government leads to wrong decisions that are influenced by a political class which leads to inefficient outcomes. Besides, such a market does not promote personal freedom of traders where a market should be free to decide how and when to produce. These controversies necessitate further research to establish concrete arguments through empirical analysis concerning whether a government should intervene in free markets whatsoever.

Literature Review

Economists such as Adam Smith argued against monopoly, feudalism, and mercantilism. According to the economist, the economy should be allowed to run on its own by use of the free market forces and free from any governmental intervention. Other researchers have built on this argument presenting that an economy that runs on a free market can create wealth and even improve the much-needed efficiency through the invisible hand (Namini, 2015). Therefore, such researchers argued that any government intervention leads to weakening of the economy since a free market operates with some invisible factors that guide the market through scarce resources. However, such researchers including Adam Smith suggested that the government has a role to protect traders in a free market. For example, Adam Smith suggested that a government has a duty to protect all citizens as well as the society from foreign invasions. However, this was not meant to imply that the government should be involved in many things that impact on the free market trade. However, the provision of social amenities and infrastructure including good roads, bridges, education, and health has a direct influence on the free economy. Aikins (2009), however, argues that for the government to achieve this, it has to tax traders as tax is mainly the only government's source of income. However, this taxation means that it has to be involved to some level on the market activities and influence their operations.

Despite the issues illustrated that government should not interfere with free markets, it has been established that a government's intervention in the market, when carried out effectively, is necessary for the performance of the economy. Therefore, researchers such as Namini (2015) believed in the mercantilism ideologies that indicate that the best way to measure the performance of a country's economy is through analyzing the imports and exports. To achieve this, a government must be involved in the process which means some forms of regulation. Therefore, Hepburn (2010) noted that it is important for traders at the international level to perform their functions through governmental interventions to ensure that they assist the government to achieve its economic and financial goals. Such economist researchers argue that a government should develop programs that benefit them with interventions such as tariffs and charters of the trading companies that facilitate a restricted trade in import and exports within the proper operations that are beneficial to the country. This will also facilitate proper allocation and utilization of resources which is imperative in the organizational development and economic development. However, this has to be done properly to motivate the traders as some governmental interventions can make it hard for trade which will discourage investors hence leading to poor market development. In this regard, the question of governmental interventions in the free markets has been viewed from either angle by researchers who do not agree on the overall recommendation. Therefore, it is important to investigate the question furthermore exploratory and empirically to develop viable recommendations.

Study Design

This study will use a time series data for various macroeconomic variables that are generated annually from different sampled countries for a period of 40 years from 1977 to 2017. The data will be obtained from the World Bank database for credibility. In order to organize the time series data obtained, a VAR model (vector autoregressive model) will be used. It should be noted that a VAR model is very commonly used in the investigation of the linkage between various macroeconomic variables which is the aim of this study. To understand the causation further, the study will also deploy an advanced time series method such as Impulse Response, Granger Causality, and Error Correlation Model. However, various tests for the stationarity of the series will need to be performed before the development of the VAR model. This will enable the researcher to check the long-run cointegration for the notable variables. It is important to note that all the system variables will be assumed to be endogenous within a system of the equations. This will enable each variable to be regressed independently regarding its lag and other lagged variables.

Expected Outcomes

This study seeks to investigate whether free markets still require at least some minimal amount of government intervention in order to operate effectively. It is expected that the findings will demonstrate the importance of governmental interventions in regulating and promoting trade both locally and internationally. The research will show the different impacts of governmental interventions then make recommendations based on whether they are positive or negative.

References

Aikins, S. (2009). Political economy of government intervention in the free market system. Administrative Theory & Praxis, 31(3), 403-408.

Ajefu, J., & Barde, F. (2015). Market efficiency and governmental intervention revisited: what do recent evidence tell us? Journal of International Business and Economics, 3(1), 20-23.

Hepburn, C. (2010). Environmental policy, government, and the market. Oxford Review of Economic Policy, 26(2), 117-136.

Le Grand, J., et al. (2008). The Economics of Social Problems. New York: Palgrave Macmillan.

Mansfield, E., & Yohe., G. (2004). Microeconomics: theory/applications. New York: Norton.

Namini, S. (2015). Adam Smith and government intervention in the economy. Review of the Wealth of Nations, 1-8.