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Government
Intervention
Government may sometimes take regulatory actions in order to
interfere with decisions made by individuals and groups of individuals
concerning social and economic issues. This influence of government made to
interrupt and affect the way financial markets and industries operate is known
as government intervention.
Many economists believe that
intervention of government in the market place does not solve but create
problems. However, there are also economists who argue that intervention of
government in economy is essential.
Effects of Government Intervention
The effect of government intervention may be positive as well as
negative. And given below are few points that show both positive and negative
effects.
1.
Eliminate market failure
Exploitation of environment by industries is one of the pressing
problems of modern world. It is impossible to stop environment unfriendly
activities of industries in a laissez faire economic model. However, if government
intervenes in economy, such deeds can be controlled and environmental pollution
can be abolished. This way, a major market failure can be eliminated with the
help of intervention of government.
2.
Prevent economic swings
Economy is dynamic in nature. Economic fluctuations are
unpredictable and inevitable. No individual or group of individuals can ever
prevent fluctuations or swings in economy. However, government can help prevent
economic swings from getting worse. Involvement of government keeps economy on
a balanced track and prevents people from experiencing extreme recessions.
3.
Improve market infrastructure
Roads, rail, electricity, water,
communication, etc. are important infrastructures that are needed to carry out
business activities effectively and efficiently. In this modern world, it is
nearly impossible to efficiently run any business firms in absence of these
infrastructures.
In a laissez faire economic model,
people and companies are free to make any decisions related to their business.
However, people won’t be able to pay for the decisions related to construction
and improvement of infrastructures for from their own pocket. Thus, government
must interfere with economy in order to develop market infrastructure of the
nation.
4.
Regulation of monopoly power
Monopoly is a state where all or almost all of the market of a
particular good or service is controlled by a single company.
If such situation exists in laissez
faire market, there are chances that the producers set very high prices and the
product becomes unattainable for the consumers of low-income group. Companies
may exploit their monopoly power by paying low wages to workers.
Such issues can be easily abolished by the government. The
government can either regulate strict laws or establish competing companies in
order to regulate monopoly.
5.
Equitable distribution of income and wealth
Monopoly power tends to grow in absence of government
intervention. Since the power grows at the cost of workers’ efforts and
consumers’ loss rather than ability of the producers, inequality is created in
the market.
Government intervention promotes competition, increase economic
efficiency and thus promote equitable or fairer distribution of income
throughout the nation.
6.
Reduce economic growth
Government intervention in economy
creates different rules and regulations that the individuals or groups of
individuals are bound to perform.
Personal freedom of making decisions on how to act and spend is
obstructed with the introduction of laws and rules. It becomes harder for
individuals to expand their financial activities and thus there will be
reduction in economic growth of the nation.
7.
Lack
of market discipline
In a laissez faire economy, businessmen make business decisions on
their own for their utmost benefit. Officials or government personnel may lack
the same market discipline as that of an accomplished businessman, and thus
government may fail to utilize scarce resources efficiently.
Government is also liable to make
inappropriate decisions under the influence of pressure of political groups,
and may end up spending nation’s budget on inefficient projects leading to
inefficient outcome.
Adopted from: https://www.businesstopia.net/economics/micro/effect-government-intervention
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