The Economics Environment

Submitted by Dorji TSHERING (Student ID no. 131404698) 1

ASSIGNMENT ON
GOVERNMENT INTERVENTION IN THE MARKET
ECONOMY

Government and markets are inextricably linked. Government sets the legal and institutional
frameworks within which markets operate. It raises taxes based on the activities of businesses
and consumers in markets. It has an interest in market outcomes and the way these are
distributed between different groups and firms in society. Sometimes Government wants to
encourage the market to deliver particular products and services for wider social benefit. At
other times it wants to discourage market products because of their wider negative effects.
These links and tensions are an intrinsic part of a modern market economy.
The degree and level of government involvement in the economy is an ongoing debate.
Regardless of the political ideology of the government of the day, all Australian governments
have acted to correct various perceived failures of the market system.
Two main reasons for government intervention are;
To overcome market failure, and
To overcome market power
The government can overcome market failure through:
Redistribution of income
Redistribution refers to the manner in which the government intervenes to transfer income
from high-income earners to low- and zero-income earners.

Public goods and services
The Economics Environment
Submitted by Dorji TSHERING (Student ID no. 131404698) 2
Goods or services that cannot be produced by the market system because they cannot be sold
to individual buyers. If made available to one, public goods are available to all, that is, they
are non-exclusionary (e.g. street lighting, national defence, public hospital, police force)

Externalities in production
Externalities (spill overs) refers to the cost or benefit borne by parties external to the firm,
that is, side effects of production. Externalities may be positive (e.g. education, transport) or
negative (e.g. pollution), depending on whether third parties are advantaged or
disadvantaged. Governments attempt to reduce negative externalities via legislation or
specific taxes and promote positive externalities by subsidising producers or by government
provision.

Maintaining competition
In a perfectly competitive market the consumer benefits from producers competing to supply
the best product at the lowest price. Competition is reduced by monopolist behaviour (e.g. by
restricting supply to raise prices and earn excessive profits)
The government controls monopolies through:
Government ownership (e.g. natural monopolies)
Legislation and regulation against anti-competitive behaviour
Setting maximum monopoly prices

Managing the economy
The government intervenes to even out the business cycle (booms and recessions) through
various macroeconomic policies (e.g. fiscal, monetary)

The Economics Environment
Submitted by Dorji TSHERING (Student ID no. 131404698) 3
Government uses restrictive trade practices to overcome market power. Restrictive trade
practices are actions undertaken with the intention of reducing competition in the market.

An example of government intervention could be in the form of regulatory bodies.
Regulatory bodies can be set up to monitor and control activities that are against the public
interest (e.g. anti-competitive behaviour of oligopolist). They can conduct investigations of
specific cases, but these may be expensive and time consuming, and may not be acted on by
the authorities. The government may provide information in cases where the private sector
fails to provide an adequate level. It may also provide goods and services directly. These
could be either public goods or other goods where the government feels that provision by the
market is inadequate. The government could also influence production in publicly owned
industries. (Office of Fair Trading, 2009)

Another example could be government intervening in markets to change consumer behaviour
where such behaviour has adverse effects on society or because of fears of adverse
consequences for the individual consumer over the long-term. An example of such behaviour
is excessive alcohol consumption which has been linked with antisocial behaviour and health
risks and imposes significant costs to the police and the health care system. Government can
focus on the demand side by attempting to influence consumer behaviour in a variety of
ways, for example, through regulation or the tax system. In the case of alcohol, products are
taxed at a higher rate than other goods and consumers under the age of 18 are banned from
consumption. Government can also use advertising campaigns and educational programmes
to highlight the costs associated with this behaviour. (Office of Fair Trading, 2009)

The Economics Environment
Submitted by Dorji TSHERING (Student ID no. 131404698) 4
To conclude, I would like to re-iterate that the Government intervention while it increases
economic efficiency when it rectifies market failures, it reduces efficiency when it distorts
perfectly competitive markets. Political choices may lead to second-best outcomes, however,
and some therefore argue that accepting market failures can be preferable to government
intervention in some cases. To be efficiency-enhancing, government spending must have
greater benefits than only efficiency-reducing taxes that finance it.