Reasons for Government Intervention in Markets (DP IB Economics)

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

1. 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 consumption

   • In 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
      

2. Earn government revenue
   Governments need money to provide essential services, public & merit goods

   • Revenue is raised through intervention such as taxation, privatisation, sale of licenses (e.g. 5G licenses), & the sale of goods/services
      

3. 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
       

4. 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
      

5. Support poorer households
   Poverty has multiple impacts on both the individual & the economy 

   • Intervention 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