Reasons why Government Intervene
- Nearly every economy in the world is a mixed economy and has varying degrees of government intervention
- One of the main reasons that governments intervene in markets is to correct various market failures
Diagram: Reasons for Government Intervention
Government intervention in mixed economic systems
1. To correct market failure
- In many markets, there is a less than optimal allocation of resources from society's point of view, resulting in market failure
- Market failure can occur for a number of reasons, e.g. externalities, overconsumption of demerit goods or monopoly power
- In maximising their self-interest, firms and individuals will not self-correct this allocation of resources and there is a role for the government
- To prevent market failure, a government can intervene to improve the economic performance of firms and markets and influence the level of production or consumption
2. Redistribute income and wealth
- Intervention seeks to achieve a more equitable (fairer) distribution of income and wealth to improve lives of citizens
- Taxing the rich to support poorer households can reduce poverty and have impacts on individuals and the economy
3. Support firms
- In a global economy, governments choose to support key industries so as to help them remain competitive
4. Collect tax revenues
- Governments need money to provide essential services, public goods and merit goods
- Services can be paid for with revenue raised through interventions such as taxation, privatisation, sale of licences (e.g. 5G licences), and sale of goods/services
5. Achieve macroeconomic objectives
- Macroeconomic objectives are centred on improving the overall performance of the economy and living standards for the population as a whole
- Government intervention in markets can influence economic stability and promote economic growth
- E.g By providing essential public health services, the government can improve the health and therefore, living standards of citizens