What is the primary role of government in a market economy?

In a market economy, the primary role of government is to correct market failures and redistribute income. Market failures occur when the allocation of goods and services by a free market is not efficient, leading to negative outcomes such as monopolies, externalities, and public goods that are underprovided. The government intervenes to promote economic efficiency and fairness.

For instance, government regulations can help prevent monopolies and promote competition, which leads to better prices and quality for consumers. Additionally, the government may redistribute income through taxation and welfare programs to address inequalities that arise from market-driven outcomes, ensuring a more equitable distribution of wealth within society. This role reinforces the stability and functionality of the market economy, allowing it to serve a broader public interest.

The other options do not accurately capture the nuanced role of government in a market economy. Setting all prices would eliminate the fundamental nature of a market-driven price system, ensuring competition is part of the role but is not the primary function, and eliminating all taxes would undermine the government’s ability to fund public goods and services necessary for a well-functioning economy.