Reasons For Government Intervention In Markets (DP IB Economics)
Revision Note
Written by: Steve Vorster
Reviewed by: Jenna Quinn
Reasons why Governments Intervene
Nearly every economy in the world is a mixed economy & has varying degrees of government intervention
Governments intervention is necessary for several reasons
A diagram showing several reasons for government intervention in mixed economic systems
Correct market failure
in many markets, there is a less-than-optimal allocation of resources from society's point of view so governments intervene to influence the level of production or consumptionIn maximising their self-interest, firms & consumers will not self-correct this misallocation of resources & there is a role for the government
E.g. Tobacco consumption is an example of market failure that the government has attempted to address by using indirect taxes to reduce consumption
Earn government revenue
Governments need money to provide essential services, public & merit goodsRevenue is raised through intervention such as taxation, privatisation, sale of licenses (e.g. 5G licenses), & the sale of goods/services
Promote equity
Equity is a normative concept. Governments aim to reduce the opportunity gap between the rich & poor but the extent to which it occurs depends on what the society & government believe to be fair. Ways in which equity is promoted include:Laws to protect workers e.g. minimum wage laws, health & safety laws
Laws to prevent monopolies from forming as they result in higher prices
Laws to prevent environmental damage
Support firms
In a global economy, governments choose to support key industries so as to help them remain competitive. Ways in which they do this include:Providing subsidies or tax breaks
Limiting foreign competition until new firms are well established & are able to compete internationally
Support poorer households
Poverty has multiple impacts on both the individual & the economyIntervention through a range redistribution policies such as progressive tax structures & welfare payments helps to reduce poverty
Four of the most common methods used to intervene in markets are indirect taxation, subsidies, maximum prices, & minimum prices
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