Question

For this week's discussion, come up with and discuss two examples of government intervention in the economy. One of them has to be an example that you consider good intervention and the other should be an example of what you consider bad intervention in the economy. There is no right or wrong answer for this one. Please be aware that you should also comment on at least of your classmates' postings, but you must be polite and respectful. Rude and disrespectful comments will not be tolerated.

Answer 1

Government intervention in the economy:

Maximizing Social Welfare :

• In an unregulated inefficient market, cartels and other types of organizations can wield monopolistic power, raising entry costs and limiting the development of infrastructure. Without regulation, businesses can produce negative externalities without consequence. This all leads to diminished resources, stifled innovation, and minimized trade and its corresponding benefits. Government intervention through regulation can directly address these issues.
• Another example of intervention to promote social welfare involves public goods. Certain depletable goods, like public parks, aren’t owned by an individual. This means that no price is assigned to the use of that good and everyone can use it. As a result, it is very easy for these assets to be depleted. Governments intervene to ensure those resources are not depleted.

Macro-Economic Factors :

• Governments also intervene to minimize the damage caused by naturally occurring economic events. Recessions and inflation are part of the natural business cycle but can have a devastating effect on citizens. In these cases, governments intervene through subsidies and manipulation of the money supply to minimize the harsh impact of economic forces on its constituents.

Socio-Economic Factors :

• Governments may also intervene in markets to promote general economic fairness. Government often try, through taxation and welfare programs, to reallocate financial resources from the wealthy to those that are most in need. Other examples of market intervention for socio-economic reasons include employment laws to protect certain segments of the population and the regulation of the manufacture of certain products to ensure the health and well-being of consumers.

An example of a price ceiling is rent control. These regulations require a more gradual increase in rent prices than what the market may demand. This regulation is meant to protect current tenants. Without rent control, there could be situations where the demand for housing in an area could cause rent prices to make a substantial jump. Unable to afford the new, significantly higher rent, a majority of the neighborhood’s tenants may be forced to move out of the neighborhood. Rent controls limit the possibility of tenant displacement by minimizing the amount by which rent can be increased.

Government wants to control inflation. Since inflation is dependant on the amount of money supply in the economy, the inflation can be controlled by reducing the money supply in the economy. This is a good intervention. Now suppose the government wants to increase its GDP growth rate. And it increases the money supply in order to do so. This may increase the nominal GDP through increase in prices. However, the real GDP remains the same and this has no effect on GDP growth rate. This is a bad intervention. A more suitable intervention in this case is to boost private investment through reduction in interest rate on loans.