DESCRIBE THE IMPORTANCE OF GOVERNMENT INTERVENTION IN THE FREE MARKET

Economic system refers to the rules practiced by a country in managing the economy. There
are three main types of economic systems, namely free market, central planning and mixed. A
free market economic system is an economic system that runs without government intervention.
Individuals and private parties are free to own factors of production and are free to use or
change ownership of factors of production to meet utilities and production goals. The
government does not intervene but sets the laws and regulations that need to be followed.
There is some importance of government intervention in the free market. Among them
are providing public goods, improving income distribution, controlling monopoly power,
controlling negative externalities and stabilizing price levels.

(i) Improving income distribution

Unfair competition in the free market has resulted in a large income distribution gap between the
rich and the poor. The government uses the system of taxation and subsidies to redistribute
income and narrow the income disparity gap. The government implements policies to eradicate
poverty and reduce income disparities among the community.

(ii) Providing public goods

The private sector does not provide public goods because public goods are not subject to the
principle of exemption and the provision of public goods usually requires high costs. The
government uses tax revenue to finance the cost of providing public goods. Public goods are
provided to enhance the welfare of the community.
(iii) Controlling negative externalities
Independent economic activity has negative external effects on others. Government
intervention through laws and regulations aims to control and eliminate negative
externalities, for example the enactment of laws enforced stopping the use of substances
such as CFCs that can affect the quality of the environment.