Reasons the government sector influences market operations in Australia

The free operation of the market system sometimes results in resources not being used in ways that efficiently satisfy needs and wants of consumers. This is known as market failure.

In Australia, although the market generally operates efficiently, sometimes the government intervenes in the economy to improve its performance and remedy market failure.

Participants in a four sector market economy The four sector market economy depicts a closed market economy, which assumes that all needs and wants are satisfied through the goods and services produced within a country; the country does not engage in trade with other countries. It does not import or export goods or services. The economy is self-sufficient. While this is not truly reflective of the Australian economy and its operations, it will be used in this instance to understand the participants in the Australian four sector market economy (that is, an economy that does not consider the influences of the foreign sector). A four sector market economy includes the following participants: Household sector includes all consumers who have unlimited needs and wants earns income in return for providing the economic resources used in the production of goods and services makes payments to the business sector in return for the supply of goods and services that satisfy wants and needs. Business sector includes all the different types of businesses that use economic resources (land, labour, capital, enterprise) to produce goods and services that satisfy wants and needs in the market Finance sector includes financial institutions that operate to borrow and lend money provides an opportunity for the household sector to save some of their income and for the business sector to save some of their profits – this is considered a leakage from the circular flow of income invests in the business and household sectors in the form of loans – this is considered an injection into the economy’s circular flow of income Government sector includes economic activities at local, state and federal levels of government collects revenue from households and businesses in the form of taxes, which reduces the amount of income available to spend on the consumption of goods and services and/or for savings – this is considered a leakage from the circular flow of income provides an injection into the circular flow of income through government spending or transfer payments. For example, welfare payments that redistribute income.

Reasons the government intervenes in the economy Re-allocation of resources Re-distribution of income Regulation of economic activity

1. Regulation of economic activity The level of economic activity refers to the rate at which national production is growing. The government intervenes through: 1. Increasing or decreasing interest rates, 2. increases or cuts to taxes 3. increasing or decreasing government spending.

2. Reallocation of resources The government intervenes in the operations of the market to reallocate resources and address: Oversupply of profitable, socially undesirable items Undersupply of affordable socially desirable items Weak competition in the market taxes on socially undesirable products (for example, alcohol, pollution). provision of public services (for example, health and education) subsidies (for example, for private health insurance, energy- and water-efficient appliances) legislation to encourage or discourage consumers to buy certain products (for example, safety devices). legislation to prevent anti-competitive behaviour (for example, the Competition and Consumer Act of 2010 enforced by the ACCC).

The labour market pays high income to some workers and low income to other workers based on scarcity, supply and demand. This results in income inequality. Income inequality is seen as a weakness of a market economy, so the government intervenes to redistribute wealth.

3. Redistribution of income The government redistributes wealth through: progressive income tax welfare benefits provision of community services compulsory superannuation regulation of wages.