Question

List five reasons why the government may want to intervene in markets and provide an example of each.

Answer 1

The government would want to intervene for the following reasons

1) To provide public goods:

In case of market failure the government would intervene in the market to provide the goods, the private market fails to allocate. Eg: roads, bridges etc.

The government knows that private parties would not intervene in the market to provide goods which have low returns,. So the government intervention is necessary for it.

2) To regulate Monopoly:

Sometimes ,the monopolies tend to provide goods at overpriced rates and exploit the consumers. Since it is a monopoly, the power of the market belongs to the firm.

In such a case, the government can regulate the Monopoly by fixing a price ceiling above which the monopolies cannot charge the consumers. This would reduce the exploitation by Monopoly.

3) Externalities

It is seen that in the free market, there tends to be externality. This means that the goods for which there is no price the market. These could be positive and negative Externalities.

Negative externality like pollution is not included in the costs of the firms and hence the firms fail to acknowledge its affect on the consumers and economy.

If the government intervenes, the scenario could change. Government could internalise the externality or could tax the firms so that the pollution has a cost and the firm takes measures to either control it or pay for it.

4) Equitable and fair distribution

There exists inequalities in various markets, wherein the richer are going Richer and the poor are going poorer. In order to ensure, that every citizen of the country gets food and basic minimum needs fulfilled, the government intervenes through taxes and subsides.

The taxes could be progressive and help in providing the public goods, ensuring fair distribution or subsidies like food stamps and other benefits of subsidised electricity or housing could also be a few interventions or initiatives of the government.

5) prevent exploitation of workers

The government can also intervene in the labour market to ensure that the minimum wage is being paid and thr workers are not being exploited.

This could be done by fixing a price floor or minimum wage , ie the minimum wage to be ensured that the workers get atleast for what is needed to fulfill the basic necessities and are not exploited.