Question

Name and describe three rationales for government intervention in markets. Provide one example of each rationale in health insurance or health care markets.

Answer 1

Three rationales for government intervention in markets are as below. Government may intervene the market by using Taxation, Subsidies or Regulations.

• To correct for market failure: Governments intervene to minimize the damage caused by naturally occurring economic events like Recessions and inflation. They can have a severe negative 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.
• To achieve a more equitable distribution of income and wealth : 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.
• To improve the performance of the economy: 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.

Example of Government Intervention for each rationale:

To improve the performance of the economy : Financing and provision of public goods forms a legitimate part of government intervention in the economy. In the context of healthcare, it implies the provision of services, such as good pest control, sewerage systems, and water purification systems, could be included within the purview of government health expenditures over and beyond cash transfers to low-income families.

To achieve a more equitable distribution of income and wealth : If some people do not have enough money, the government needs only to tax the rich and transfer cash to the poor so that they too are able to freely participate in the market for healthcare services.

To correct for market failure: Regulation can help make health care market forces work better to produce the outcomes we desire. So it is with health care markets that some regulation—such as review of proposed mergers—is necessary both to preserve competition and to enforce the rules of the market