Question

Adam Smith’s Theory of the Invisible Hand is often used to justify a hands-off approach to market activity. Can you give an example where government intervention in a market led to an inefficient outcome? How about an example where government intervention improved the outcome?

Answer 1

The best example where govt. intervention in the market can lead to inefficient outcome and it can cause the failue of govt. itself.The failure of market is a socially inefficient allocation of resources in a free market.It can occur becaue of ; Demerit/merit goods ,Public goods ,Externalities ,Monopoly power .Also the inefficiency in allocation of resources occurs due to poor incentive in public ector,lack of information , technological lacknes,Political reasons and their decision .Transport is prone to market failure as it is a good with a significant level of externalities like driving car into city can caues pollution and congestion ( 2 negative externality).In this way the govt. intervention causes social inefficient allocation of resources like time watage of business and commuters , congestion.Now , the govt. Intervention can cause efficient outcome like busines start up investment/spending by the gpvt. ,boosting or providing financial help to the innovative channels, privatization of govt. sectors for infrastructural development by proper allocation of resources and by free trade .In this way the govt. intervention can causes efficient outcome .

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