Question
In: Finance
When do you think the government should intervene in our economy and to what extent? Cite...
When do you think the government should intervene in our economy and to what extent? Cite recent and relevant examples to support and clarify your views.
Solutions
Expert Solution
Answer
The government should interfere when interference in the price
mechanism is to change the allocation of resources and achieve what
they perceive to be an improvement in economic and social
welfare.
All governments of every country intervene in the economy to
influence the allocation of scarce resources among competing
uses
The main point of time when government should intervene
1. At the time of market failure
2. When there is unequal distribution of income and wealth
3. During poor performance of the economy
Government may intervene the market by using price control, tax and subsidy.
Up to what extent?
Government should intervene only when market is in disequilibrium situation and government decision should be taken with care they will not cause market disruption due to incorrect decision or politically influenced decision.
Examples of government intervention
1. Price Ceilings
In price ceiling the government puts a legal limit on how high the
price of a product can be.
2. Subsidy
A subsidy is a form of financial assistance paid to a business or
economic sector. In a free market, there tends to be inequality in
income, wealth and opportunity. Private charity tends to be
partial. Government intervention is necessary to redistribute
income within society.
3. Price Floors
A price floor is the lowest legal price a commodity can be sold at.
Price floors are used by the government to prevent prices from
being too low.
4. Other factor
a. Fairness.
b. Distribution of Inherited wealth.
Recent and relevant examples to support
1. Recent skinny budget introduced by US government i.e. to
spend less in the economy will effect USA’s economy as spending of
government will reduce and it will have respective effect on the
economy.
2. New regulation introduced in banking system by government of US
to save USA economy from another financial crisis.
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