Question

Discuss the possibility of government intervention into any markets it determined to be less than competitive in order to enforce competition.

Answer 1

Government is responsible for all the economic activities going on in the market. It is responsible for ensuring the optimal allocation of resources among the producers and also for the optimal allocation of goods and services among people. In a nut cell the government is the highest agency to ensure the betterment of all the agents in the economy.

Competitive market is one in which the price and quantity of any goods and services is determined by the free play of the market forces of demand and supply. But sometimes it happens that there is lack of competition in the market and some firms gains some monopoly power and hence uses it to earn extra profit.

In such a situation, when the market becomes less competitive and the firms make supernormal profit and hence it is a loss of the consumers and also overall loss of welfare. So in such situations it is essential for the government to intervene in the market and ensure competition.

There may be many forms of government intervention in the market but in such a situation like lack of competition the government intervention takes the form of taxes or price ceiling. If a producer is charging a higher price and earning large profit, than government can either impose a tax on its profit or imposes a price ceiling. If tax is imposed it doesn't bring the price low so most often in situation like this government imposes a price ceiling i.e. fixes a price above which the seller can't charge the consumers.

So government intervention is both possible and necessary in a market where there is less competition.