Customer Service Chat
Get quote & make Payment
Rationale for government intervention, economics, Microeconomics
Rationale for government intervention
There are six major functions the government can perform in an economy.
1. The government provides a legal and social framework within which market individuals and sellers buy and sell goods and services produced from the scarce resources of the economy. Laws are passed to define the legal status of business in terms of rights of private ownership, and enforcement laws, so as to ensure a fair and orderly relation between the producers and the consumers. These regulations include licensing, patents, restrictions on price competition, and restrictions on free flow of international trade.
Licensing is usually justified to ensure a minimum degree of competence and to protect the public against fraud and harm in cases where it is difficult for the public to gather information about the quality of product or service. It is often used to restrict entry into business, profession, or trade and to restrict competition. Patents restrict entry by providing the patent holder (individual or firm) to use the invention in exchange of royalty payments. Patent is the right granted by the government to an inventor for the exclusive use of the invention for a period of 17 years. Restrictions on price competition are in form of announcement of support prices, procurement prices, etc in agriculture, ocean shipping rates and many others.
2. Legislations are enacted to maintain competition in markets for specific goods and services. The Indian government passed the monopolies and restrictive trade practices act in 1969 to deal with anticompetitive or monopolistic behaviour.
3. Redistribution of income so as to achieve economic justice. This is achieved by government by several means such as progressive income tax and transfer payments in the form of subsidies and unemployment benefits.
4. To reallocate resources as misallocation of resources leads to externalities, that is, some benefits and costs. From the perspective of supply-and-demand analysis, the presence of cost externalities tends to increase the supply and lower the price of a product. Thus, the quantity of the product will generally be greater than it would be without this type of externality.
5. Stabilisation of the aggregate economy is the next objective of government intervention. The market economy is prone to periodic upswings and downswings. Downswings in the cycle are accompanied by reduction in output, jobs, and income, and upswings in the cycle are often accompanied by inflation. Government in India has used monetary and fiscal policy to control the volatility of business cycles.
6. Government plays an active and direct role in regulation of natural monopolies (firms in which the average cost of production falls continuously with an increase in output) like electricity and water supply, does not fall under any of the categories listed above. Government regulates certain key aspects, such as prices and the amount of profits, of "natural monopolies."
From above it follows that, in order to maximise national income in the long run, the government may employ either
- indirect methods like industrial, monetary, fiscal and commercial policy or regulations in the form of incentives and disincentives; or
- direct methods through provision of public goods.
Indirect controls comprise rules and provisions to regulate the private economic activity. Custom duties, taxes, subsidies, credit policy, monetary policy, etc. fall under this category. For example, manufacturers of cotton textile may be free to produce any type of textiles they like, but government may offer subsidies, credit and other facilities if the government aims at increasing output of coarse cloth badly required by the poor consumers. Similarly, the government may restrict manufacture of luxury automobiles (which it considers to be non-essential) by imposing heavy excise duty on them. Methods of indirect control are not as effective as direct controls. Measures of indirect control preserve the price mechanism and try to modify it. Direct controls involve physical controls relating to the prices and distribution of goods and services, like industrial licensing, quota restrictions, etc.
Posted Date: 2/10/2012 11:27:48 PM | Location : United States
Ask an Expert
Rationale for government intervention, economics, Assignment Help, Ask Question on Rationale for government intervention, economics, Get Answer, Expert's Help, Rationale for government intervention, economics Discussions
Write discussion on Rationale for government intervention, economics
Your posts are moderated
Write your message here..
Trade policy, TRADE policy: The well known economist D. H. Robertson h...
TRADE policy: The well known economist D. H. Robertson has immortalized the role of trade in development with his famous statement that "trade is an engine of growth". The pol
Feudalism, A type of economy (like in Europe in the Middle Ages) which is p...
A type of economy (like in Europe in the Middle Ages) which is primarily agricultural however productive enough to support a class of merchants andartisans. Feudal societies are co
Engel curve, graphic
Allocated stock and safety stock - mrp system, Allocated Stock and Safety S...
Allocated Stock and Safety Stock Allocated stock A category of stock which ensures that current stock is set aside and not issued under the normal procedure. Safet
Econ, Draw a Production Possibilities Frontier with consumer goods on the v...
Draw a Production Possibilities Frontier with consumer goods on the vertical axis and capital goods on the horizontal axis. Show how the PPF will shift if the production of capita
Rate law, The reaction of nitrogen dioxide with fluorine 2 NO2 + F2 2 NO2F...
The reaction of nitrogen dioxide with fluorine 2 NO2 + F2 2 NO2F is first order in NO2 and first order in F2. Complete the rate law for this reaction in the box below. Use the f
Equibilium, Suppose Dlamini has R5 000 to spend on trousers and shirts. The...
Suppose Dlamini has R5 000 to spend on trousers and shirts. The price of trousers is R500 each and that of shirts is R312.50 each. 6.1 Use the information and calculate consumer eq
Distinguish between of trade and the balance of trade, Distinguish among th...
Distinguish among the terms of trade and the balance of trade for a country. Definition of terms of trade a) The amount of a given amount of export goods essential to buy
Supply and demand with graphs, Supply function given by equation QS = 3P - ...
Supply function given by equation QS = 3P - 50. Write an equation proposals if: a) Government introduces subsidies of 5 $ per unit; b) the government introduced subsidies of 15%
Calculate the concentration of standard solution, 1. A standard solution of...
1. A standard solution of potassium hydroxide (KOH) was prepared by dissolving 15g of KOH in 250.0mL of distilled water. (a) Calculate the concentration of this standard solution.
Accounting Assignment Help
Economics Assignment Help
Finance Assignment Help
Statistics Assignment Help
Physics Assignment Help
Chemistry Assignment Help
Math Assignment Help
Biology Assignment Help
English Assignment Help
Management Assignment Help
Engineering Assignment Help
Programming Assignment Help
Computer Science Assignment Help
Why Us ?
~24x7 hrs Support
~Quality of Work
~Time on Delivery
~Privacy of Work
Human Resource Management
Literature Review Writing Help
Terms & Conditions
Copyright by ExpertsMind IT Educational Pvt. Ltd.