Introducing Supply and Demand
4. Government Intervention and Disequilibrium
Why Governments Intervene In Markets
Governments intervene in markets when they inefficiently allocate resources.
LEARNING OBJECTIVES
Identify reasons why the government might choose to intervene in markets
KEY TAKEAWAYS
Key Points
- The government tries to combat market inequities through regulation, taxation, and subsidies.
- Governments may also intervene in markets to promote general economic fairness.
- Maximizing social welfare is one of the most common and best understood reasons for government intervention. Examples of this include breaking up monopolies and regulating negative externalities like pollution.
- Governments may sometimes intervene in markets to promote other goals, such as national unity and advancement.
Key Terms
- inefficient market: An economy where social optimality is not acheived; an economy where resources are not optimally allocated
Governments intervene in markets to address inefficiency. In an optimally efficient market, resources are perfectly allocated to those that need them in the amounts they need. In inefficient markets that is not the case; some may have too much of a resource while others do not have enough. Inefficiency can take many different forms. The government tries to combat these inequities through regulation, taxation, and subsidies. Most governments have any combination of four different objectives when they intervene in the market.