Question

The existence of a market failure often invites for government intervention in a particular market. It is generally recommended that governments should play a facilitating role rather than a direct role in markets. Regulatory interventions should be limited. Appropriate interventions should have three general aims. To improve market infrastructure, Interventions infrastructure would target, Roads, Rail, market-facilities, water points and Health-control infrastructures. To improve information is important for facilitating effective marketing. To improve institutional infrastructure is the most important government role in marketing. Government interventions should promote an open and stable institutional framework. This can be in the form of improving security like protecting property rights and contracts and controlling corruption and violence. The kinds of policies that government may implement include taxes, subsidies, wage and price controls, and regulations.

Many classical economists believe that there should be no government intervention. The business cycle is just that. It is a cycle where the economy grows and shrinks. Eventually it gets back in balance. Keynesian economist believe that the economy should be regulated somewhat by the government. Growth periods should not be too long. Recessions should be helped with policy. When the government does intervene, the measurement of the impact of the policy is always a little "suspect" to me. There's never a real instant impact and I think it's because it is a cycle. It takes time to go thru the cycle.

What is your view and why?

Do you roll with the classical economists or the Keynesian economists?

Answer 1

Meaning :-

Market intervention of government is a method used by government to remove externalities of the market equilibrium.

Reasons for government intervention :-

1) To correct market failures.

2) To achieve equitable distribution of income and wealth.

3) To improve the performance of the economy.

Methods of government intervention :-

1) Taxes

2) Subsidies

3) State ownership

4) State funding

5) Minimum and Maximum Prices

6) Regulating the market

7) Protection

Significance of government intervention :-

1) Value judgment- Many persons want intervention due to personal interest.

2) Changing prices to change incentives and behavior- Helps to determine effectiveness of policies.

3) Social Science -People's behavior cannot be forcasted

4) Combination of policies- They work in combination with market demand and supply

5) Law of unintended consequences- Intervention does not always work in the way intended.

6) Power of markets- To provide profitable solutions to market problems.

Classical and Keynesian approach to government intervention :-

Though both approaches support government intervention , however Keynesian approach suggest much more government intervention by creating new jobs , increasing tax rate to redistribute income more equally etc .

Externalities due to which intervention occurs :-