Question

Why do we see government interventions in the markets despite the fact that equilibrium price set by the free market is in fact the most economically efficient point in the market?

Answer 1

The most efficient point that is seen in the free market is one the marginal private benefit is equal to the marginal cost but what happens is that there can be third-party costs incurred with the efficient level would be when the marginal social cost would be equal to the marginal benefit on the whole and consider the case of pollution where the optimal level is run by the companies but what happens is thatthere would be social cost incurred due to the pollution as it hampers the environment as a result of which the government steps in and decide to reduce the pollution levels as a result of which it would incur method such as pollution tax etc as a result of which the supply decreases and the marginal social cost would be equal to that of marginal benefit and efficiency is obtained from the society point of view and that is the reason why it can be understood thatgovernment intervention is necessary at times even though private efficiency is obtained