Executive Summary
This paper will aim to gauge the costs and the benefits of the government intervention in a market. We will comprehensively analyze the situations in which it’s essential for the government to intervene and maximize the societal benefit. We will also discuss the limitations posed by the government intervention to the free market forces and its impact on economic welfare.
Introduction:
The extent of government intervention in private markets has always been a challenging question for economists. The two streams of economists, comprising of free market economy and planned economy pose different views on government intervention in private markets. Free market economists debate that government interference in private market should be sternly restricted as it leads to inefficiencies in allocation of resources. Conversely, the other group is of the opinion that government intervention results in various economic benefits for the society.
Arguments for Government Intervention:
There are many reasons listed in the favor of government intervention, however the two main arguments gauged in its favor are: (i) distributional arguments and (ii) market failure arguments. These two reasons are extremely well recognized, and have been given broad theoretical analyses (Caillaud & Guesnerie 1988).
In most cases the government opts to intervene in the market to achieve a more equal distribution of income. Government meddles in the price mechanism in order to alter the allocation of economic resources in such a way as to maximize economic and social welfare. Every government interferes in the market to sway the distribution of limited resources amongst its alternative uses. All government bodies strive towards achieving the goal of a more equitable distribution of income and resources in order to ensure that every member of society has basic necessities of life, which the market forces fails to do so on their own. It has the basic agenda of maximizing the social welfare of the society by increasing the social benefits and decreasing the social costs, hence attaining the optimal point of production for any economic activity involved. Whereas the private markets tends to focus on maximizing their own private benefits at the cots of the cost borne by the society and can unjustly allocate economic resources based upon the purchasing power and the hierarchal status of the individuals. The following graph depicts that the private market own its own will produce the quantity Q, however with government intervention Q(opt) will be produced that is the optimum quantity with maximum social welfare. Here marginal benefits will equal the marginal cost i.e. maximum available benefits to the society and the minimum cost of any economic activity ( pareto efficient outcome).
(Fmyer, 2011)
The second important argument for government intervention is when the market fails. It means that the market fails to provide pareto efficient allocation of resources and is not allocating the scarce resources in an efficient way as also shown previously in the diagram. Market fails in many occasions where market either under provides a particular good, ceases to provide a good (public good) or the consumer under consumes a good (merit good), thus leading to inefficient resource allocation and reducing the social welfare. For example, where there are these two conditions involved; non-rivalry (when consumption of that good by one person doesn’t reduce the quantity available for the other) and non-excludability (one can’t exclude the other person from using it) market fails completely. In such cases it’s essential for government to intervene in the market and correct the inefficiencies hence maximize the benefits for society as a whole.
Arguments against Government Intervention:
The basic reason given against the government intervention is that it hampers the market forces and the freedom of the economic agents by meddling in the market; hence in some cases it leads to inefficient allocation of resources. This happens ‘because governments can never direct supplies of limited resources and assign values to goods and services as capably and astutely as markets can. Instead of eradicating markets, they attempt to attribute them for their own reasons’ (Bremmer, 2010). Mostly the government bodies are blinded by the political pressure and their personal choices hence the end up taking wrong decisions which results in inefficient allocation of resources. Mostly economists argue that the market forces are the best decision makers for the economy and if left on their own they will allocate the scarce resources in the most efficient way Economists also object that the government intervention in the market restricts the freedom of the individual making a choice and tries to make choices on their behalf (WB, 1981). Such decision taken on the behalf of the other economic agents are usually based on the limited information available to the government and are more or less an approximation of figures. This leads to a high risk of taking wrong decisions of extremely crucial economic scenarios.
Conclusion
It depends upon the situation and the scenario, which will alter the benefits of government intervention in the market. If the market is failing in efficient allocation of resources and there is a need of corrective force then government should intervene to maximize the social welfare. However, where market is running smoothly with the forces of demand and supply then there should be prevalence of free market.
Works Cited:
Bremmer, I. (2010). The end of the free market: Who wins the war between states and corporations? <i>European View</i>.
Caillaud, B., & Guesnerie, R. (1988, January 1). Government Intervention in Production and Incentives Theory: A Review of Recent Contributions. Retrieved December 4, 2014, from http://ac.els-cdn.com/0047272788900382/1-s2.0-0047272788900382 main.pdf?_tid=4b71b4d6-7c05-11e4-9cec-00000aacb35f&acdnat=1417732471_11aed2b360fe988c20490db025d54f9f
Fmyer, M. (2011, January 1). A Social (Entrepreneurship) Dilemma. Retrieved December 4, 2014, from http://thetrosastory.wordpress.com/2011/10/25/a-social-entrepreneurship-dilemma/
WB, S. (1981, January 1). Evaluation of some arguments against government intervention to influence territorial population dis | POPLINE.org. Retrieved December 4, 2014, from http://www.popline.org/node/385303
