Question

3. Do the existence of externalities (in either their positive or negative form) justify government intervention in the economy? Why or Why not?

Answer 1

When the existence of one person or element affects the existence or wellbeing of others or in more appropriate words we can say that externalities are the cost or benefit caused by the producer that is not financially incurred or received by that producer. In any economy, Externalities occurs when the production or consumption of a specific good or service impacts a third party that is not directly related to the production or consumption of that good or service. Externalities can be negative as well as positive.

Arguments in favour of governments intervention :

1. In the free market economy there is always a chance of inequality

2.Governments intervention is necessary to overcome market failure because governments may tax or regulate negative externalities while subsidizing positive ones availing a level playing field for all.

3. One of the way to adjust externalities is by imposing a tax as a result government becomes necessary for its regulation.

4. Increasing inter and intrastate environment can only e tackled collectively with the government playing a vital role.  

5.The government can intervene in a market using regulations and laws. E.g the Health and Safety at Work Act covers all public and private sector businesses.

Arguments against the government's intervention:

1. Free market economist argues that the role of the state should always be minimal because they believe in Invisible hand in the markets which brings everything to equilibrium.

2. When government intervene they often may fell prey to political pressure resulting in poor economic policies.

3. Governments intervention may take away the freedom of the individual to make choices.