Effect of Government Intervention

Government may sometimes take regulatory actions in order to interfere with decisions made by individuals and groups of individuals concerning social and economic issues. This influence of government made to interrupt and affect the way financial markets and industries operate is known as government intervention.  

Many economists believe that intervention of government in the market place does not solve but create problems. However, there are also economists who argue that intervention of government in economy is essential.

The effect of government intervention may be positive as well as negative. And given below are few points that show both positive and negative effects.

Eliminate market failure

Exploitation of environment by industries is one of the pressing problems of modern world. It is impossible to stop environment unfriendly activities of industries in a laissez faire economic model. However, if government intervenes in economy, such deeds can be controlled and environmental pollution can be abolished. This way, a major market failure can be eliminated with the help of intervention of government.

Prevent economic swings

Economy is dynamic in nature. Economic fluctuations are unpredictable and inevitable. No individual or group of individuals can ever prevent fluctuations or swings in economy. However, government can help prevent economic swings from getting worse. Involvement of government keeps economy on a balanced track and prevents people from experiencing extreme recessions.  

Improve market infrastructure

Roads, rail, electricity, water, communication, etc. are important infrastructures that are needed to carry out business activities effectively and efficiently. In this modern world, it is nearly impossible to efficiently run any business firms in absence of these infrastructures.

In a laissez faire economic model, people and companies are free to make any decisions related to their business. However, people won’t be able to pay for the decisions related to construction and improvement of infrastructures for from their own pocket.  Thus, government must interfere with economy in order to develop market infrastructure of the nation.

Regulation of monopoly power

Monopoly is a state where all or almost all of the market of a particular good or service is controlled by a single company.

If such situation exists in laissez faire market, there are chances that the producers set very high prices and the product becomes unattainable for the consumers of low-income group. Companies may exploit their monopoly power by paying low wages to workers.

Such issues can be easily abolished by the government. The government can either regulate strict laws or establish competing companies in order to regulate monopoly.

Equitable distribution of income and wealth

Monopoly power tends to grow in absence of government intervention. Since the power grows at the cost of workers’ efforts and consumers’ loss rather than ability of the producers, inequality is created in the market.

Government intervention promotes competition, increase economic efficiency and thus promote equitable or fairer distribution of income throughout the nation.

Reduce economic growth

Government intervention in economy creates different rules and regulations that the individuals or groups of individuals are bound to perform.

Personal freedom of making decisions on how to act and spend is obstructed with the introduction of laws and rules. It becomes harder for individuals to expand their financial activities and thus there will be reduction in economic growth of the nation.

Lack of market discipline

In a laissez faire economy, businessmen make business decisions on their own for their utmost benefit. Officials or government personnel may lack the same market discipline as that of an accomplished businessman, and thus government may fail to utilize scarce resources efficiently.

Government is also liable to make inappropriate decisions under the influence of pressure of political groups, and may end up spending nation’s budget on inefficient projects leading to inefficient outcome.