Question

Why does the government intervene in the economy? Should they and what would the impact be if they did not? PLEASE USE OUTSIDE RESEARCH for this discussion not just the text -- at least one additional source.

Answer 1

Markets are said to be failed when they produce a level of output that is inefficient from societal viewpoint. They create a deadweight loss which is actually the root cause of market failure. These are consumption distortion losses.
Government can alleviate these consumption distortion losses by regulating price and quantity of the production entities involved. A monopolist produces an inefficient output level and might charge an exorbitant price if remains unregulated.
Hence, the government can regulate it by imposing tax or reducing price to its average cost or marginal cost.
The government intervenes in the market to mitigate and/or eliminate market inefficiency.
Market inefficiency can arise due to informational asymmetry, lack of market competition, natural monopoly, externality and uncontrolled pricing power of a firm.
For example,......

if a firm has monopoly power and chooses to set any price to maximize profit, it erodes consumer surplus and the society becomes worse-off. Consider an electricity company which is a local monopoly, and sets price based on his own private cost-plus pricing strategy, disregarding consumers' ability to pay for this essential product.

This will result in a market failure and net welfare loss.
Again, negative externality is another reason for concern. Imagine a firm having a plant that emits too much toxic fume, causing serious air pollution.
In absence of government intervention, the firm will operate solely on basis of its own cost and demand, disregarding the social cost it generates by creating pollution (a negative externality) and making the society worse-off.
But if the government intervenes and sets up a strict pollution control norm, the plant will be compelled to resort to technological improvements meant for reducing pollution. This will mitigate the externality.
Therefore, pertinent government intervention will prevent net welfare loss for the society.