09.25 soro1/2028 Goverment Intervention - What ls I, Types, Economic Examples > WallStreetMojo Q Home » Economics Rs » Government Intervention Government Intervention Article by Edited by Reviewed by Rutan Bhattacharyya Aaal Dheeraj Vaidya, CFA, FRM What Is Government Intervention? Government intervention refers to the regulatory action taken by a government that aims to change decisions made by individuals, organizations, or groups regarding economic and social matters. Its primary goal is to maximize a country’s social welfare by correcting market failure. Government Intervention Dee en Prete Cee Perse ret (© You are free to use this image o your website, templates, etc, Please provide us with an attribution link tipsy. wallstreetmojo.comigovernment-nterventionitypes a6.09.25 soro1/2028 Goverment Intervention - What ls I, Types, Economic Examples > WallStreetMojo Q economic imbalances. According to them, demand and supply laws are not enough to ensure economic equilibriums, and the government must intervene to ensure the economy's proper functioning. Different types of government intervention exist, like subsidies, taxes, etc. Table of contents © What Is Government Intervention? ° ° Government Intervention In The Economy Explained Reasons Types Examples Effects Pros And Cons Government Intervention vs. Laissez-Faire Frequently Asked Questions (FAQs) Recommended Articles Key Takeaways * The government intervention defi ion refers to a set of regulatory actions taken by a government to influence resource allocation and market mechanisms. © There are various advantages of government intervention. For example, it provides merit goods that are unavailable in the market. Moreover, it reduces income inequality and poverty in the country. © The concept has certain downsides. For example, it may disincentivize producers to be more efficient and innovative. Moreover, since the htipsitinww.wallstreetmoja.comigovernment-nterventionypes 21609.25 soro1/2028 Goverment Intervention - What ls I, Types, Economic Examples > WallStreetMojo Q * Governments may intervene for multiple reasons, such as reducing monopoly power and redistributing income and wealth. Government Intervention In The Economy Explained The government intervention definition refers to a regulatory action carried out by any government that directly impacts a market economy, to change the free market equilibrium. It is necessary because of the market inefficiencies and failures. To pursue specific social and economic goals and improve welfare, the government introduces rules and regulations to deliver unachievable results under a free market Governments have multiple tools at their disposal to intervene when issues arise. For example, they may utilize the introduction of new programs, funding, taxes, etc. A government may also intervene if local governments cannot handle natural disasters. Such disasters may occur owing to economic problems, not just humanitarian or physical issues. The significance of such an intervention depends on the type of economic system a nation adopts. In the case of a command economy system, such intervention is significant. The government identifies what is best for the economy and allocates the available resources accordingly. Moreover, it makes decisions related to the manufacturing and distribution of goods. Under this system, the private sector's role is minimal; it can even be zero. On the other hand, a free market economy functions in reverse and focuses on minimizing intervention. It operates freely via a demand and supply, mechanism. This mechanism ensures a more efficient allocation of resources than the command economy system. Moreover, under a free market economy, a government's role is typically restricted to imposing rules for recognizing and safeguarding private property ownership. That said, the private sector plays a crucial role in this system. nitpslwww:vallstreetmojo.comigovernmentintervetion!ttypes ane09.25 soro1/2028 Goverment Intervention - What ls I, Types, Economic Examples > WallStreetMojo Q a market economy. Both the government and the private sector play a crucial role. One must remember that the roles and importance of the private sector and the government varies between nations. For example, Cuba and China are inclined towards a command economy. On the other hand, in the US and UK, the private sector plays a more crucial role in managing economic resources. Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series) ->> If you want to learn Financial Modeling & Valuation professionally , then do check this Financial Modeling & Valuation Course Bundle (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald's forecast methodologies, advanced valuation techniques, and financial statements. Reasons Governments may intervene to fulfill certain objectives. Let us look at some of them. © Changing consumer behavior © Safeguarding people via consumer protection policies © Preserving the environment © Providing indivisible services and non-market products htipsitinww.walstreetmojo.comigovernment-nterventionypes ane09.25 soro1/2028 Goverment Intervention - What ls I, Types, Economic Examples > WallStreetMojo Q Sonprovenrene nr marnee raneuurny © Providing basic infrastructure * Limiting monopoly power * Redistributing wealth and income * Providing basic healthcare and education Types Let us discuss the different types of government interventions in detail: #1 - Price Controls These are government regulations related to prices, wages, or their rates of change. A government may impose such regulations on a wide range of offerings. Alternatively, it can impose regulations on any market involving a single good. Price controls are of two types — © Price Floor — This is the minimum price one can charge for goods and services. It aims to safeguard suppliers. © Price Ceiling — This is the maximum price suppliers can charge for a product or service. Its purpose is to safeguard consumers by ensuring that the offerings are affordable for as many consumers as possible. #2 - Subsidy Subsidies are incentives that a government gives businesses or individuals through grants, tax breaks, or cash to increase the supply of specific goods and services. For example, it can be a payment to suppliers, enabling them to minimize their cost of production and increase their output. This, in turn, allows individuals to access products and services at a lower price, leading to an improved standard of living. #3 — Tax nitpslwww:vallstreetmojo.comigovernmentintervetion!ttypes sie09.25 soro1/2028 Goverment Intervention - What ls I, Types, Economic Examples > WallStreetMojo Q utilizes the funds to increase economic capital by offering public goods, for example, trains, bridges, roads, national defense, etc. This economic capital is crucial for increasing an economy's production capacity over the long term. Governments can impose taxes on taxpayers directly, for example, via income tax. Alternatively, they may impose taxes indirectly, for example, through value-added tax or sales tax. #4 — Regulations Regulations ensure that economic activities run properly. There are multiple government regulations, each of which impacts economic activity differently. Let us check out some of the different regulation categories. ¢ Environment: For instance, governments launch multiple regulations concerning the environmental effect of business operations on the environment. The introduction of environmental safety standards is one example. © Employment: The government issues laws, rules, and regulations concerning fair recruitment, wages, and workforce safety and health. * Competition: Governments impose certain regulations, for example, Mergers and acqu ns and antitrust regulations, to promote fair competition. Moreover, this category involves deregulation, for instance, eliminating the limits on foreign investors’ share ownership. © Consumer Protection: This category protects consumers from unfair practices concerning price rules, product descriptions, and safety and health standards. Some other ways in which governments may intervene are as follows: * Raising or dropping interest rates: Governments increase or decrease interest rates to ensure liquidity and stability in the economy. nitpslwww:vallstreetmojo.comigovernmentintervetion!ttypes ene09.25 soro1/2028 Goverment Intervention - What ls I, Types, Economic Examples > WallStreetMojo Q Examples Let us look at a few government intervention examples to understand the concept better. Example #1 The UK government acted with its biggest-ever intervention to ensure that the rail fare increases do not exceed 5.9%, which is 6.4 percentage points less than the retail price index figure on which the increases are historically based. The rail fares will officially increase in March 2023. However, like in 2022, the government will freeze the fares for January and February, thus giving passengers additional time to buy cheaper tickets at the current rate. Because of the unprecedented inflation, the government has aligned the surge in fares to the average earnings growth of July 2022 rather than the retail price index. Thus, it has halved the increase, ensuring that the surge is easier on family finances. Example #2 Suppose a significant portion of Country A’s population, primarily low-and- middle-income families, doesn't have health insurance. As a result, the country’s government offers a healthcare subsidy as a tax credit that enables eligible citizens to access medical facilities easily. Effects Let us look at some government intervention effects. * It can increase the efficiency of the firms operating within a market. Moreover, interventions such as deregulation lead to more competitive nitpslwww:vallstreetmojo.comigovernmentintervetion!ttypes 7609.25 soro1/2028 Goverment Intervention - What ls I, Types, Economic Examples <> wallstreetMojo Q ¥ Muvuuy pee Laps Ur ps firms within the market. Hence, businesses may not be able to achieve reyurauur rcuuces Ure prums caricu vy supernormal profits. That said, these policies can make firms more efficient. Certain interventions like performance targets and minimum quality standards positively impact the quality of the products and services offered by firms. Pros And Cons Let us look at the pros and cons of government interventions: Pros It reduces the potential political risk. Government intervention reduces poverty and inequality via the tax and benefit system. The government can intervene to provide public and merit goods unavailable in the free market. It keeps the nation safe with military protection and offers consumers security when selecting products. Another key advantage of government intervention is that it can safeguard the environment's long-term interest. Cons Government ownership can lead to fewer options for individuals. Political pressure groups may influence the government. The lack of incentives may lead to inefficient production. Sometimes, people may find the government regulations overbearing on their choice. nitpslvww:vallstreetmojo.comigovernmentintervetion!ttypes ane09.25 soro1/2028 Goverment Intervention - What ls I, Types, Economic Examples > WallStreetMojo Q Government Intervention vs Laissez-Faire The concepts of government intervention and laissez-faire can often be confusing for individuals new to the world of finance. However, one can eliminate such confusion by knowing the differences between them. So, let us look at the key distinguishing characteristics of each of these concepts. Government Intervention Laissez-faire This refers to the actions taken by a This is an economic country's government to interfere with the _ philosophy of free market decisions of individuals and firms to achieve capitalism; it opposes the objective of overcoming market failure. government intervention. Government intervention proponents believe that ! dd d insufficient t Laissez-faire advocates at su and demand are insufficient to PPly . aa believe that the market ensure economic equilibrium, and regulates itself through governments must intervene to ensure that demand and supply. the economy functions correctly. Frequently Asked Questions (FAQs) 1. Which government interventions cause a consumer or producer surplus? Subsidies, price controls, and other interventions may increase producer or consumer surplus. That said, one must remember that according to economic theory, losses sustained by the other side may outweigh any gain This net harm causes deadweight loss. 2. Is government intervention good? The proponents of this concept believe that it offers multiple benefits. For example, it safeguards the environment and ensures the health and safety of nitpslvww:vallstreetmojo.comigovernmentintervetion!ttypes eneoo 25 00v2004 Coenen neenin - Whale Tyee Ezonom Exams > WallStreetMojo Q resources. 3. Are government interventions to alleviate poverty sustainable? Such interventions to alleviate poverty can be sustainable over a long period if the policies include sufficient provisions of products and services, which include fee healthcare, subsidized housing, and free education of good quality. 4. How firms can respond to government intervention? Firms can adapt and make changes to their operations. Alternatively, they can respond by withdrawing their operations from the nation altogether. Recommended Articles This article has been a guide to what is Government Intervention. We explain its reasons, types, examples, effects, pros, cons, and comparison with Laissez- Faire. You may also find some useful articles here — Limited Government © Say’s Law ¢ Economic Liberalism Comments 1. George says | found it very relevant. Reply Leave a Reply Your email address will not be published. Required fields are marked * nitpslwww:vallstreetmojo.comigovernmentintervetion!ttypes s0n6