Government Interventaion in Market

Topics: Welfare economics, Externality, Economics Pages: 3 (825 words) Published: February 16, 2013
Intervention in the market
What are the main reasons for government intervention?
The main reasons for policy intervention are:
•To correct for market failure
•To achieve a more equitable distribution of income and wealth •To improve the performance of the economy
Options for government intervention in markets
There are many ways in which intervention can take place – some examples are given below 1. Government Legislation and Regulation

* Parliament can pass laws that for example prohibit the sale of cigarettes to children, or ban smoking in the workplace. * Employment laws may offer some legal protection for workers by setting maximum working hours or by providing a price-floor in the labour market through the setting of a minimum wage. * The economy operates with a huge and growing amount of regulation. The government appointed regulators who can impose price controls in most of the main utilities such as telecommunications, electricity, gas and rail transport. Free market economists criticise the scale of regulation in the economy arguing that it creates an unnecessary burden of costs for businesses – with a huge amount of “red tape” damaging the competitiveness of businesses.

2. Fiscal Policy Intervention

Fiscal policy can be used to alter the level of demand for different products and also the pattern of demand within the economy. * Indirect taxes can be used to raise the price of de-merit goods and products with negative externalities designed to increase the opportunity cost of consumption and thereby reduce consumer demand towards a socially optimal level * Subsidies to consumers will lower the price of merit goods. They are designed to boost consumption and output of products with positive externalities – remember that a subsidy causes an increase in market supply and leads to a lower equilibrium price * Tax relief: The government may offer financial assistance such as tax credits for business...
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