One of the main issues in economics is the extent to which the government should intervene in the economy. Free market economists argue that government intervention should be strictly limited as government intervention tends to cause an inefficient allocation of resources. However, others argue there is a strong case for government intervention in different fields, such as externalities, public goods and monopoly power.
This is a summary of whether should the government intervene in the economy.
Arguments for government intervention
- Greater equality – redistribute income and wealth to improve equality of opportunity and equality of outcome.
- Overcome market failure – Markets fail to take into account externalities and are likely to under-produce public/merit goods. For example, governments can subsidise or provide goods with positive externalities.
- Macroeconomic intervention. – intervention to overcome prolonged recessions and reduce unemployment.
- Disaster relief – only government can solve major health crisis such as pandemics.
Arguments against government intervention
- Governments liable to make the wrong decisions – influenced by political pressure groups, they spend on inefficient projects which lead to an inefficient outcome.
- Personal freedom. Government intervention is taking away individuals decision on how to spend and act. Economic intervention takes some personal freedom away.
- The market is most efficient at deciding how and when to produce.
Arguments for government intervention to improve equality
In a free market, there tends to be inequality in income, wealth and opportunity. Private charity tends to be partial. Government intervention is necessary to redistribute income within society.
- Diminishing marginal returns to income. The law of diminishing returns states that as income increases, there is a diminishing marginal utility. If you have an income of £2 million a year. An increase in income to £2.5 million gives only a marginal increase in happiness/utility. For example, your third sports car gives only a small increase in total utility.
- However, if you are unemployed, and surviving on £50 a week. A 10% increase in income gives a substantial boost in living standards and quality of life. Therefore, redistributing income can lead to a net welfare gain for society. Therefore income redistribution can be justified from a utilitarian perspective.
- Fairness. In a free market, inequality can be created, not through ability and handwork, but privilege and monopoly power. Without government intervention, firms can exploit monopoly power to pay low wages to workers and charge high prices to consumers. Without government intervention, we are liable to see the growth of monopoly power. Government intervention can regulate monopolies and promote competition. Therefore government intervention can promote greater equality of income, which is perceived as fairer.
- Inherited wealth. Often the argument is made that people should be able to keep the rewards of their hard work. But, if wealth and income and opportunity depend on being born into the right family, is that justified? A wealth tax can reduce the wealth of the richest, and this revenue can be used to spend on education for those who are born in poor circumstances.
- Rawls social contract. Rawls’ social contract stated that the ideal society is one where you would be happy to be born in any situation, not knowing where you would end up. Using this social contract, most people would not choose to be born in a free market because the rewards are concentrated in the hands of a small minority of the population. If people had no idea where they would be born, they would be more likely to choose a society with a degree of government intervention and redistribution.
Government intervention to overcome market failure
1. Public goods. In a free market, public goods such as law and order and national defence would not be provided because there is no financial incentive to provide goods with a free-rider problem (you can enjoy without paying them). Therefore, to provide public goods like lighthouses, police, roads, e.t.c it is necessary for a government to pay for them and out of general taxation. see: public goods
2. Merit goods / Positive externalities. Goods like education and health care are not strictly public goods (though they are often referred to as public goods). In a free market, provision tends to be patchy and unequal. Universal education provided by the government ensures that, in theory, everyone can gain an education, which has a strong social benefit.
see: Government subsidy for goods with positive externalities
3. Negative externalities. The free market does not provide the most socially efficient outcome if there are externalities in consumption and production. For example, a profit maximising firm will ignore the external costs of pollution through burning coal. This leads to a decline in social welfare. By contrast, other forms of energy production, like solar power, are environmentally friendly and have a positive externality. By taxing production which causes pollution costs and using the subsidy to encourage other forms of energy production, there is a net gain in social welfare.
see: Tax on negative externalities
4. Regulation of monopoly power. In a free market, firms may gain monopoly power; this enables them to set higher prices for consumers. Government regulation of monopoly can lead to lower prices and greater economic efficiency. See: Regulation of monopoly power
5. Disaster relief. In a major disaster such as Coronavirus, there is a strong need for government intervention in many forms as the market cannot solve. Firstly, governments are needed to slow the spread of a very infectious virus. This may involve imposing lockdowns and quarantines. Secondly, there is a need for government intervention to deal with the economic costs of these health measures. For example, giving loans and subsidies to firms to keep hiring workers during the difficult time period.
Should governments save declining industries?
- Yes. If large industries go out of business, there will be high regional unemployment and market failure from the difficulty in finding new jobs.
- No. If the government prop up declining industries, they will be saddled with high costs and a permanently unprofitable industry.
See more at: Solutions to declining industries.
Macro Economic Intervention
In recessions, there is a sharp fall in private sector spending and investment, leading to lower economic growth. If the government also reduce spending at the same time, there is an even bigger fall in economic growth and collapse in confidence. In a deep recession, governments can borrow from the private sector and spend the money to employ unemployed resources. If there is a collapse in the money supply, there may be a role for the Central bank or Government to print money.
Similarly, the government may need to prevent an economic boom and explosion of credit. Keynesian economists argue that the government can positively influence the economy through fiscal policy. Monetarists believe monetary policy can help encourage economic stability, though an independent Central Bank may not be considered government intervention.
More on government intervention in the macro economy
Arguments against Government Intervention
- When governments spend on public goods and merit goods, they may create excess bureaucracy and inefficiency.
- State owned industries tend to lack any profit incentive and so tend to be run inefficiently. Privatising state owned industries can lead to substantial efficiency savings.
- Politicians don’t have the same market discipline of seeking to maximise the use of limited resources.
- Government intervention causes more problems than it solves. For example, state support of industries may encourage the survival of inefficient firms. If governments bailout banks, it may create moral hazard where in the future banks have less incentive to avoid bankruptcy because they expect a government bailout.
- Real business cycle theorists argue that at best government intervention makes no difference to the length of a recession, but may just create additional problems, such as the accumulation of public sector debt.
There is no real model of a society run in the absence of government intervention. Even the most extreme libertarian economists would accept there needs to be some state protection of property rights and spending on national defence. The debate comes on the extent of government intervention. This needs to take place in each aspect of government intervention. The arguments for and against government intervention in macro economic stabilisation are very different to the arguments for and against providing universal health care. It is not satisfactory
photo top Darren Goody
12 thoughts on “Should the government intervene in the economy?”
yes it should because it reduces monopoly which tends to exploit the masses.
Monopolies are created by said government through patents, intellectual property, the corporation entity system, politicians being allowed to be bribed, and many other things.
All your regulation assertions will do is increase monopolies
we have been learning about the great depression this year in school
Yes I am on Disability income. 2019 grand total for 1 year. Yes one year $8364.00 This is what I live on. You are f##$# when you can not buy a vehicle. You hope you live in a town that has buses, free rides. or you walk. Kicker is I co-pay to see a doctor/ medicines. Because I have no Family I ask for a ride to go see my doctors/ I have stop seeing some of my doctors. No way to get there.I am told by hatters i need to go back to work. I wish the [email protected]#$ i could go back to work. Dead in jobs are know paying $10.00–$12 a hour. No i can not go back to work. I tried to buy a cheap vehicle. I was told you do not make enough money. I did get a loan offer from a car dealer, He wanted to charge me 39% interest. I join this charity group that said they would get me a vehicle. Five years i did every thing they wanted to me do. every day i log in 365 days just to be ask to give money to a go fund me. The CEO did not stop the harassment, The site manger never answer her emails. so this charity got away with it. I am still with out a vehicle. Yes i ask the church in this dog town to help me. I put up on community board that i was in need of a vehicle, so i could drive to my doctors. Six years it was up. I need hearing aids/glasses/ my medicare medicade will not pay for it. yet they pay my doctor $400.00 to see me for 5 minutes. and to have more blood tests done. they want me to co-pay. Know i only see my family doctor.
I am so happy that I am alive to live poor is living below the poverty line. This is the USA where we care
Have you tried calling “Medride”, or some other medical transportation outfit to get you to your doctor appointments? Medicare will pay for that. Talk to a Medicare patient advocate (social worker). How are you getting your groceries? Walmart may deliver in your area.
Sorry to hear about having so many agencies giving you “lip service”. There’s no reason for you to respond to this…I’m just trying to throw out suggestions.
I am sorry to hear of your troubles and all I can say is PRAY< TRULY PRAY and ask God for the help you need. He will listen and he will provide when you put God FIRST EVERYTHING FALLS INTO PLACE.
Am ojinji ikechukwu bigman
A student of rivers state university
Government should intervene in the market economy
To reduce the cost and lost of unity in the market economy
And create a social welfare on the economy
when the imposter is sus
Yes, because the government are the who can help us to reduce economic and social inequalities by devising physical control and fiscal measures over production, distribution and consumption of commodities. In general they are the one who stabilize economic development in our country.
I think the government should let the congress and senators live on ssi or ss for the time that we have live on it and see if the can make all the payments on that money we all get to live on per month and that is our government.RIGHT!
If you think of what caused the Great Depression….
1. what caused the Great depression?
What caused the Great depression was the the stock markets where crashing and the markets had to close and the banks had ran out of money to pay every one there amout that they had saved in the Bank.
2. why did the people wont all of there money out of the bank?
why did all of the people wont all of there money out of the bank was because they thought that if the stock market shut down then the they thought that there money was lost in the bank that why the banks closed down and then the great depression had began.
3. why did the bank run out of money?
The banks ran out of money and that’s why they were not able to pay all of the people there money
thank you for reading this it only took took me 4 min to right this hole thing.