- Interventionist strategies are put in place by governments to correct the failings of the free market and promote the welfare/development of its citizens
- Interventionist strategies aim to increase human capital, productivity and output
- These can lead to an improvement in the standard of living
Interventionist Strategies to Generate Economic Growth & Development
Strategy
|
Explanation
|
Advantages
|
Disadvantages
|
Tax policies
|
- A progressive tax system redistributes from those with higher income to those with lower income & reduces income inequality
|
- Redistribution often starts with the provision of free education & healthcare paid for from tax revenue
- Tax revenue provides the means of supporting poorer households and the unemployed
|
- Sometimes, the benefits of a good progressive tax system are eradicated by the penalties imposed through multiple regressive (indirect) taxes
- If the tax burden is too high it may become a disincentive to work
|
Transfer payments
|
- Transfer payments are usually given to the poorest & most vulnerable people in society and include unemployment & disability payments, pension payments, heating discounts, public transport subsidies etc.
|
- The poorest households are supported
- Money received from transfer payments generates consumption in the economy and increases aggregate demand
|
- Poorer countries have less money available to support the poor
- There is an opportunity cost for the government associated with each transfer payment
- Supporting the poor makes good economic sense but is sometimes politically unpopular
|
Minimum wages
|
- Minimum wages are set above the free market rate and firms are not allowed to pay anyone less than the legal rate
|
- Workers receive higher wages and have more disposable income
- Consumption increases leading to increased aggregate demand
- Standard of living increases with higher income
|
- Costs of production for firms increase, possibly leading to less international competitiveness
- With higher costs of production, output may fall leading to increased unemployment
|