When people think of free markets, they typically picture them as having minimal to no involvement from the government. However, in practice governments do intervene in order to stabilise markets, regulate transactions, establish institutional frameworks, and enforce laws relating to contract law and property rights. When markets fail, governments also have the ability to interfere, typically in the form of bailouts and other emergency measures.

In this essay, we will investigate the ways in which the government has an impact on the markets and exerts influence over business, which frequently result in unanticipated outcomes.

KEY TAKEAWAYS
 

• The ability of governments to make significant shifts in monetary policy and fiscal policy, such as increasing or decreasing interest rates, which has a significant influence on business, is a source of great power.
   
• They have the ability to strengthen the currency, which can momentarily increase corporate earnings and share prices but, in the long run, leads to a decline in values and an increase in interest rates.
   
• When businesses or entire sections of the economy are failing or threatening to bring down the entire economic system, governments have the ability to step in and provide financial assistance in the form of bailouts.
   
• Either tariffs, in which taxes are placed on imported goods in order to raise costs and make domestic goods more competitive, or subsidies, in which money is taken from the general public and given to a specific industry, can be enacted by governments.
   
• Increases in taxes, fees, and restrictions can be detrimental to individual companies as well as entire industries.
   

Currency and Price Increases
 

The only entity that are legally able to create their own currencies are the respective governments of such countries. In most cases, governments will seek out ways to cause inflation in the currency, particularly if they believe they can get away with doing so. Why? Because it provides a short-term boost to the economy in the form of higher prices for goods and services offered by businesses, but it also lowers the value of government bonds that have been issued in the inflated currency and are owned by investors.

When money is inflated, it may seem nice for a short period of time, particularly for investors who see corporate earnings and share values flying up, but the long-term result is an erosion of value across the board. Because savings have no value, savers and people who buy bonds are being punished. Again, investors who purchased bank bonds based on those debts would suffer losses as a result of this development because debtors will now be required to pay a lower value to retire their loans. This is excellent news for debtors. Borrowing becomes more appealing as a result of this, but the subsequent rise in interest rates will quickly make borrowing less appealing.

A Look at Interest Rates

Interest rates are another common weapon, despite the fact that they are frequently employed in an effort to combat inflation. This is due to the fact that they can stimulate the economy by lowering the cost of borrowing money. It is more likely that businesses and individuals will borrow money and make further purchases if interest rates are lowered rather than raised by the Federal Reserve.

Unfortuitously, this can also lead to asset bubbles, which, in contrast to the steady erosion of capital caused by inflation, can destroy enormous quantities of money. This leads us neatly to the third way in which the government can affect the market: by manipulating interest rates.

Bailouts Following the economic crisis that lasted from 2008-2010, it is common knowledge that the federal government of the United States is willing to rescue businesses and industries that have gotten themselves into financial problems. Even before the crisis, many were aware of this truth. Even though the government has a history of supporting non-financial enterprises like Chrysler (1980), Penn Central Railroad (1970), and Lockheed (1971), the savings and loan crisis of 1989 was hauntingly similar to the bank bailout of 2008.

These bailouts occurred in the form of loan guarantees, as opposed to the direct investments that were made possible through the Troubled Asset Relief Programme (TARP).
 

By altering the regulations and so allowing badly managed businesses to continue operating, bailouts have the potential to distort the market. These types of rescues frequently result in losses for the stockholders of the rescued company as well as the company's lenders. Under typical market conditions, these companies would be forced to liquidate their assets and close their doors, with the proceeds going to pay off their debts as well as, if at all possible, shareholders. Thankfully, the government only uses its power to safeguard the industries that are the most vital to the overall functioning of the economy, such as banks, insurance companies, airlines, and automobile manufacturers.

There are both subsidies and tariffs.
 

When viewed through the lens of the taxpayer, subsidies and tariffs are, for all intents and purposes, the same thing. A subsidy is when the government raises taxes on the general population and then provides the money collected from those taxes to a specific industry in order to increase the profitability of that industry. When the government imposes taxes on imported goods in the form of a tariff, it does so with the intention of making those goods more expensive and so enabling domestic suppliers to charge higher prices for their wares. These two courses of action have an immediate and discernible effect on the market.

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The provision of advantageous conditions to an industry by banks and other financial institutions is significantly bolstered by the provision of government assistance to that business. Because of the favourable treatment and financing provided by the government, more capital and resources will be invested in that industry, despite the fact that the only competitive advantage it possesses is backing from the government. Because of this strain on resources, those industries that compete more successfully on a global scale must now exert greater effort in order to acquire access to capital. This impact can be more pronounced when the government acts as the primary client for particular businesses, which has resulted in well-known cases of overcharging contractors and projects that are chronically delayed.

Regulations as well as the Business Tax
 

The corporate sector rarely raises objections over bailouts provided to specific industries; this may be due to the awareness that their own industry may, at some point in the future, require assistance as well. However, when it comes to rules and taxes, Wall Street does have some objections. This is due to the fact that while tariffs and subsidies can provide a competitive edge to a company, regulations and taxes can have a negative influence on earnings.

During the initial rescue of Chrysler, Lee Iacocca served as the company's Chief Executive Officer. In his autobiography, titled Iacocca: An Autobiography, Lee Iacocca explains that one of the primary reasons Chrysler need financial assistance was due to the rising costs associated with ever-increasing safety rules. This pattern can also be noticed in other types of businesses. As the number of laws increases, some of the smaller service providers are unable to compete with the larger corporations because of the economies of scale they enjoy. It is possible that this will result in a highly regulated industry dominated by a small number of huge corporations that are inextricably linked to the government.

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The imposition of excessive taxes on the profits of corporations has the additional effect of possibly discouraging the entry of new businesses into the country. Countries with lower tax rates are more likely to attract any mobile corporations, just as lower tax rates in individual states might entice businesses away from their immediate neighbours. Worse yet, businesses that are unable to relocate are forced to pay the higher tax, putting them at a disadvantage in the marketplace and making it more difficult for them to acquire financial backing from investors.

Which nation has the most unrestricted markets?
 

The Index of Economic Freedom compiled by the Heritage Foundation puts Singapore as the nation with the most economically free markets. This ranking places Singapore at the top of the list.

After that comes Switzerland, then Ireland, then New Zealand, and finally Luxembourg in that order. The United States of America finishes in the middle of the pack at the 25th spot.

When it comes to libertarianism, what exactly is the function of the state in the market?
The political and economic doctrine known as libertarianism is characterised by its support for free markets, reduced taxation, and a smaller role for the government. Following in the footsteps of Adam Smith's ideas, strict libertarians believe that the government is only accountable for a select few core responsibilities, including the following:

protecting and enforcing private property rights maintaining a domestic police force to keep citizens safe maintaining a standing army to protect the nation's borders and interests building public works (such as schools and parks) that would benefit society but the free market wouldn't be incentivized to otherwise build protecting and enforcing private property rights maintaining a standing army to protect the nation's borders and interests protecting and enforcing private property rights protec
 

Why is it Necessary for Governments to Implement Certain Regulations?
 

If there is full information (or what economists refer to as "perfect information") among all players in a free market, including buyers and sellers, producers and consumers, the market will only function effectively. However, in the real world, some vendors could be con artists, and some businesses could be producing substandard goods by taking short cuts. An information asymmetry describes the situation that has arisen here. Consumers may suffer enormous loss, both economically and in other ways, in the meantime, despite the fact that the market may, at some point in the future, detect and punish such unethical behaviour. Because of this information imbalance, regulations have been established for the purpose of providing protection for consumers.

The Crux of the Matter
 

The contributions that governments make to the global economy are significant. Regulations, government subsidies, and taxation all have the potential to have an immediate and long-term effect on businesses and whole industries. Because of this, Fisher, Price, and a few other well-known investors believed the possibility of legislative change to be a significant component to consider when analysing stock prices. It is possible for a fantastic investment to turn out to be less than wonderful if there is a chance that it may lose its advantage over the competition and its profits as a result of certain acts taken by the government.