Why is there a need for government intervention in the market? Basically, there are two reasons: social efficiency and equity. Social efficiency occurs at an output where social marginal benefits are equal to the social marginal costs of production or consumption. Governments are pressured to provide a fair distribution of resources among their people but it is quite subjective for the issues of equity. Taxes and subsidies are used to regulate market efficiency. Taxes can reduce a monopolist’s profits without affecting price or output and subsidies can help the monopolist to produce a competitive level. Laws can also be established to prevent monopolies and oligopolies and offer consumer protection.
The government intervention in the market can create positive or negative results. Countries with business-friendly governments have generally performed better than countries where this relationship between government and business has suffered. These business-friendly countries have responded more positively to pro-growth policy … Read More