Question

Construct a discussion on the different ways that government intervenes in South Africa. Support your discussion by citing real life examples of such intervention from reliable sources (South Africa) ....Please talk about current life examples such as Covid 19 etc...

Answer 1

1. Greater equality – redistribute income and wealth to improve equality of opportunity and equality of outcome.
2. Overcome market failure – Markets fail to take into account externalities and are likely to under-produce public/merit goods. For example, governments can subsidise or provide goods with positive externalities.
3. Macroeconomic intervention. – intervention to overcome prolonged recessions and reduce unemployment.
4. Disaster relief – only government can solve major health crisis such as pandemics.

Arguments against government intervention

1. Governments liable to make the wrong decisions – influenced by political pressure groups, they spend on inefficient projects which lead to an inefficient outcome.
2. Personal freedom. Government intervention is taking away individuals decision on how to spend and act. Economic intervention takes some personal freedom away.
3. The market is most efficient at deciding how and when to produce.

Arguments for government intervention to improve equality

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.

• Diminishing marginal returns to income. The law of diminishing returns states that as income increases, there is a diminishing marginal utility. If you have an income of £2 million a year. An increase in income to £2.5 million gives only a marginal increase in happiness/utility. For example, your third sports car gives only a small increase in total utility.
  • However, if you are unemployed, and surviving on £50 a week. A 10% increase in income gives a substantial boost in living standards and quality of life. Therefore, redistributing income can lead to a net welfare gain for society. Therefore income redistribution can be justified from a utilitarian perspective.
• Fairness.  In a free market, inequality can be created, not through ability and handwork, but privilege and monopoly power. Without government intervention, firms can exploit monopoly power to pay low wages to workers and charge high prices to consumers. Without government intervention, we are liable to see the growth of monopoly power. Government intervention can regulate monopolies and promote competition. Therefore government intervention can promote greater equality of income, which is perceived as fairer.
• Inherited wealth. Often the argument is made that people should be able to keep the rewards of their hard work. But, if wealth and income and opportunity depend on being born into the right family, is that justified? A wealth tax can reduce the wealth of the richest, and this revenue can be used to spend on education for those who are born in poor circumstances.
• Rawls social contract. Rawls’ social contract stated that the ideal society is one where you would be happy to be born in any situation, not knowing where you would end up. Using this social contract, most people would not choose to be born in a free market because the rewards are concentrated in the hands of a small minority of the population. If people had no idea where they would be born, they would be more likely to choose a society with a degree of government intervention and redistribution.

Government intervention to overcome market failure

1. Public goods. In a free market, public goods such as law and order and national defence would not be provided because there is no financial incentive to provide goods with a free-rider problem (you can enjoy without paying them). Therefore, to provide public goods like lighthouses, police, roads, e.t.c it is necessary for a government to pay for them and out of general taxation. see: public goods

2. Merit goods / Positive externalities. Goods like education and health care are not strictly public goods (though they are often referred to as public goods). In a free market, provision tends to be patchy and unequal. Universal education provided by the government ensures that, in theory, everyone can gain an education, which has a strong social benefit.

see: Government subsidy for goods with positive externalities

3. Negative externalities. The free market does not provide the most socially efficient outcome if there are externalities in consumption and production. For example, a profit maximising firm will ignore the external costs of pollution through burning coal. This leads to a decline in social welfare. By contrast, other forms of energy production, like solar power, are environmentally friendly and have a positive externality. By taxing production which causes pollution costs and using the subsidy to encourage other forms of energy production, there is a net gain in social welfare.

see: Tax on negative externalities

4. Regulation of monopoly power. In a free market, firms may gain monopoly power; this enables them to set higher prices for consumers. Government regulation of monopoly can lead to lower prices and greater economic efficiency. See: Regulation of monopoly power

5. Disaster relief. In a major disaster such as Coronavirus, there is a strong need for government intervention in many forms as the market cannot solve. Firstly, governments are needed to slow the spread of a very infectious virus. This may involve imposing lockdowns and quarantines. Secondly, there is a need for government intervention to deal with the economic costs of these health measures. For example, giving loans and subsidies to firms to keep hiring workers during the difficult time period.

Should governments save declining industries?

• Yes. If large industries go out of business, there will be high regional unemployment and market failure from the difficulty in finding new jobs.
• No. If the government prop up declining industries, they will be saddled with high costs and a permanently unprofitable industry.