How did Neoclassical economists rationalize a policy of laissez faire with respect to the potential intervention into a market economy by government? Why do modern economists, on the other hand, acknowledge a role for government. A well-structured answer will include: Solution Ans : In broad terms, there are three kinds of economic policies. The first is government ownership, or socialism, where the government directly owns the means of production. The second is government regulation, or interventionism, where the government leaves production to the private sector but tries to shape market outcomes with subsidies, taxes, licensing, price and quantity restrictions, standards of quality, safety, and health, non-waivable worker and consumer rights, and other measures. The third is the free market, or laissez-faire, where private property rights and freedom of contract alone provide the framework for interaction between firms, consumers, and workers. The relationship between libertarianism and laissez-faire is a simple one: laissez-faire is the libertarian position on economic policy. While most who use the libertarian label admit exceptions, even the most moderate use laissez-faire as a benchmark. Different economic perspectives emphasize specific elements of capitalism in their preferred definition. Laissez-faire and liberal economists emphasize the degree to which government does not have control over markets and the importance of property rights. Classical economics can trace its roots to Adam Smith in 1776. In The Wealth of Nations Adam Smith presented a comprehensive analysis of economic phenomena based on the notions of free markets and actions guided by individual self interests in a laissez faire environment. This work by Smith was motivated in large part as a critique of the existing merchantilist system. Under mercantilism the ruling aristocracy directed economic activity with the primary goal of benefiting the ruling aristocracy. The merchantilist view was that the wealth of a nation was based on the wealth of the ruling aristocracy. Smith argued, quite convincingly, that the wealth of a nation was actually based on the productivity of resources, which was best achieved if the producers, consumers, and resource owners were left to their own \"selfish\" actions. Economists also applied this classical framework to macroeconomic issues, especially unemployment, economic growth, and business-cycle stability. With this application a comprehensive theory of macroeconomics was developed that offered an explanation for macroeconomic phenomena and provided recommendations for government policies. The classical study of macroeconomics emerged from a set of axioms and assumptions that were used for all economic analysis, such as wants and needs are unlimited, resources are limited, people are motivated by self interest, and more is preferred to less. However, three particular assumptions proved most important to the study of macroeconomic phenom.

1. How did Neoclassical economists rationalize a policy of laissez faire with respect to the potential
intervention into a market economy by government? Why do modern economists, on the other
hand, acknowledge a role for government.
A well-structured answer will include:
Solution
Ans :
In broad terms, there are three kinds of economic policies. The first is government ownership, or
socialism, where the government directly owns the means of production. The second is
government regulation, or interventionism, where the government leaves production to the
private sector but tries to shape market outcomes with subsidies, taxes, licensing, price and
quantity restrictions, standards of quality, safety, and health, non-waivable worker and consumer
rights, and other measures. The third is the free market, or laissez-faire, where private property
rights and freedom of contract alone provide the framework for interaction between firms,
consumers, and workers. The relationship between libertarianism and laissez-faire is a simple
one: laissez-faire is the libertarian position on economic policy. While most who use the
libertarian label admit exceptions, even the most moderate use laissez-faire as a benchmark.
Different economic perspectives emphasize specific elements of capitalism in their preferred
definition. Laissez-faire and liberal economists emphasize the degree to which government does
not have control over markets and the importance of property rights.
Classical economics can trace its roots to Adam Smith in 1776. In The Wealth of Nations Adam
Smith presented a comprehensive analysis of economic phenomena based on the notions of free
markets and actions guided by individual self interests in a laissez faire environment. This work
by Smith was motivated in large part as a critique of the existing merchantilist system.
Under mercantilism the ruling aristocracy directed economic activity with the primary goal of
benefiting the ruling aristocracy. The merchantilist view was that the wealth of a nation was
based on the wealth of the ruling aristocracy. Smith argued, quite convincingly, that the wealth
of a nation was actually based on the productivity of resources, which was best achieved if the
producers, consumers, and resource owners were left to their own "selfish" actions.
Economists also applied this classical framework to macroeconomic issues, especially
unemployment, economic growth, and business-cycle stability. With this application a
comprehensive theory of macroeconomics was developed that offered an explanation for
macroeconomic phenomena and provided recommendations for government policies.
The classical study of macroeconomics emerged from a set of axioms and assumptions that were

2. used for all economic analysis, such as wants and needs are unlimited, resources are limited,
people are motivated by self interest, and more is preferred to less. However, three particular
assumptions proved most important to the study of macroeconomic phenomena--flexible prices,
Say's law, and saving-investment equality.
Neoclassical and Keynesian macro-economists emphasize the need for government regulation to
prevent monopolies and to soften the effect of boom and bust cycle.
The main plank of his revolutionary theory is the assertion that the aggregate demand created by
households, businesses and the government and not the dynamics of free markets is the most
important driving force in an economy. This theory further asserts that free markets have no self-
balancing mechanisms that lead to full employment. Keynesian economists urge and justify a
government's intervention in the economy through public policies that aim to achieve full
employment and price stability. Their ideas have greatly influenced governments the world-over
in accepting their responsibility to provide full or near-full employment through measures (such
as deficit spending) that stimulate aggregate demand.
In modern economies governments take on many tasks in response to the flaws in the market
mechanism. The military, the police, the national weather service, and highway construction are
all typical areas of government activity. Socially useful ventures such as space exploration and
scientific research benefit from government funding. Governments may regulate some
businesses (such as banking and drugs) while subsidizing others (such as education and health
care). Governments also tax their citizens and redistribute some of the proceeds to the elderly
and needy. How do governments perform their functions? Governments operate by requiring
people to pay taxes, obey regulations, and consume certain collective goods and services.
Because of its coercive powers, the government can perform functions that would not be possible
under voluntary exchange. This coercion increases the freedoms and consumption of those who
benefit while reducing the incomes and opportunities of those who are taxed or regulated.
But for all the wide range of possible activities, governments have three main economic
functions in a market economy. These functions are increasing efficiency, promoting equity, and
fostering macroeconomic stability and growth.
1. Governments increase efficiency by promoting competition, curbing externalities like
pollution, and providing public goods.
2. Governments promote equity by using tax and expenditure programs to redistribute income
toward particular groups.
3. Governments foster macroeconomic stability and growth