Effects of government intervention in markets

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Effects of government intervention in markets

This detailed article examines the effects of government intervention in markets. The government often intervenes in markets with the best of intentions; however, some of the interventions may end up with the unintended consequences. The intervention can take many forms. For example, subsidies may be given to certain producers to make products cheaper. The government may set minimum wages or give workers special rights such as not being able to be fired or not having their contracts terminated by their employer without appropriate communication and consultation.

 

What is government intervention?

According to the Cambridge Dictionary (2022) government intervention refers to the actions of the government to influence the way financial markets or particular industries operate. The government often needs to intervene in markets to address several challenges that may arise due to both domestic and international market and socio-political dynamics.

 

Types of government intervention in markets

 

Price controls

The government may intervene in markets by imposing price controls. Price controls refer to the maximum price that businesses can charge for their products and services. According to Fischer (2022) these are an exercise of governmental power which is always enacted as a public good.  This type of intervention is common with essential commodities such as food and energy. However, it may sometimes lead to shortages as businesses may not make enough money to continue operations.

 

Subsidies

A subsidy is a financial help such as loans, grants, or tax credits by the government to reduce or eliminate the cost of production. For example, oil producers like the government of Saudi Arabia may subsidise the cost of producing oil. Likewise, the U.S. federal government has long supported the country’s agricultural industry by providing farmers with cash subsidies to help control the supply of essential crops

 

Taxes

The government can also impose taxes on goods. A good example of this is taxes on tobacco products. Some governments impose high taxes on tobacco products to discourage smoking.

 

Tariffs

Another way in which the government intervenes in markets is by imposing tariffs. A tariff is a tax imposed on imported goods. Governments impose tariffs to protect domestic producers from foreign competition.

 

Trade barriers

The government may impose trade barriers such as quotas and embargoes. Trade barriers are limits on the number/amount of imports or exports allowed.

 

Regulation

The government regulates industries by issuing licenses and enforcing standards for quality, safety, environmental practices and so on.

 

Reasons for government intervention in markets

There are several reasons why the government intervenes in markets. First, it may want to reduce poverty, help the poor, and protect workers from exploitation by employers. Second, it may want to reduce inequality by making the rich pay more in taxes and using the money to help the poor. However, taxing the rich more has been an issue of contention in many countries.

 

Third, it may want to regulate the environment in which people operate by imposing standards on pollution, safety, and working conditions. Fourth, it may have to regulate the flow of capital and prevent money laundering and fraud. And last but not the least, it needs to make industries more competitive by regulating monopolies, cartels, and mergers.

 

Positive effects of government intervention in markets

There are many positive effects of government intervention in markets. First, it protects the public from dangerous products and services such as tainted food, drugs, fraudulent schemes, and so on. Second, it regulates industries to maintain a minimum level of competition. If there are only a few companies in an industry, they may collude by sharing information and rigging prices so that they all make more profits. Government regulators may prevent this from happening by imposing minimum competition standards on cartels.

 

Third, the government collects data and makes it available to people so that they can make better decisions. For example, government weather forecasts help people to decide when to go on vacations. Likewise, the government may ban or put age limits on the purchase of certain products to ensure safe usage which results in less accidents or even violence.

 

Negative effects of government intervention in markets

Despite the positives that government intervention in markets provides, there are some negatives that it brings. First, it increases the costs of doing business by forcing producers to meet the government standards on pollution, safety, and so on. Second, it may reduce economic growth as some business may not be able to function profitably. For example, many businesses around the world have ceased operations as the cost of operations became higher due to higher taxes, business rates and so on.

 

Third, the government intervention may encourage many people to be dependent on the government for their survival. Last but not the least, it reduces trust in society by creating a society where only people with political power are perceived to be capable of making a real difference.

 

Summary of the effects of government intervention in markets

As shown above, there are many effects of government intervention in markets. The government often intervenes in markets to reduce inequality, improve resource allocation, and increase competition. However, not all interventions bring in positive results. Therefore, the best thing that a government can do is to create an environment in which businesses can thrive. In such an environment, businesses can do whatever is necessary to succeed. However, it does not mean that there will not be any regulations guiding the behaviour of businesses.

 

Surely, the interventions are necessary when public good is at risk. However, there will be different effects of government intervention in different market structures.  For example, if the market is competitive enough, and consumers have lots of options, the government does not need to do anything to increase further competition. Likewise, the government may ban or impose high taxes on certain goods if they are considered increasing public health risk.

 

Hope you like this article: ‘Effects of government intervention in markets’. Please share the article link on social media to support our work. You may also like reading:

Resource allocation and economic systems

Factors affecting economic growth

Advantages and disadvantages of economies of scale

 

Last update: 02 November 2022

References:

Cambridge Dictionary (2022) Government intervention, available at: https://dictionary.cambridge.org/dictionary/english/government-intervention (accessed 01 November 2022)

Fisher, P. (2022) Investors Should Watch Out For Price Controls And ‘Sick Chickens’, available at: https://www.forbes.com/sites/forbesfinancecouncil/2022/03/07/investors-should-watch-out-for-price-controls-and-sick-chickens/?sh=2f56ff883c40 (accessed 02 November 2022)

Author: Joe David

Joe David has years of teaching experience both in the UK and abroad. He writes regularly online on a variety of topics. He has a keen interest in business, hospitality, and tourism management. He holds a Postgraduate Diploma in Management Studies and a Post Graduate Diploma in Marketing Management.