One of the most critical issues in economics is the degree to which a government should influence or intervene in the economy. In this context, free market economists assert the interventions of a government should be increasingly limited as it has the tendency of encouraging inefficient allocation of resources. Others, however, believe that government intervention is important in all the areas of economics in the market including equality and macroeconomics and market failure. Nonetheless, while in almost in agreement, those in favor of a mild form of intervention argue that government intervention should only be used to correct market failure.
To determine the argument above, it is first important to understand the concept of market failure. Market failure in economics can be described as the condition within which the allocation of both products and services is not considered efficient such that it leads to social welfare loss. More elaborately, it concerns the situation in which decisions by individuals fail to achieve socially desirable outcomes. Thus, it is a condition in which a market solution does not result to maximum welfare or social optimum. The consequence of this is negative effects on both the economy and the society, hence, the importance of government intervention.
One of the reasons for the argument that government intervention should be restricted to market failure, as suggested above, regards the consequences associated with the same. In essence, market failure results in serious consequences that can only be remedied through government intervention. One of the most common effects of market failure is structural unemployment which is often caused by the reorganization orchestrated by market failure. Market failure can also results in the inability for markets to offer pure public goods thereby affecting livelihoods. Other consequences include the over consumption of goods and services with negative externalities and exclusion of low income families that further encourage high relative poverty.
Considering the above, it is increasingly evident that government intervention in market failure is highly important. This is because it ensures that the consequences above are solved and in the process encouraging socially desirable incomes that ensure that not only economic standards are raised but also social welfare. For instance, if a government jumps in to ensure large business remain in business, it will help solve the problem of structural employment ensuring the availability of employment opportunities. On the other side, if leading industries go out of business, they will encourage high regional unemployment and the process also encourage increased marked failure. Nonetheless, while proponents see government intervention in market failure as important, there is the argument that propping up declining sectors will only ensure that governments and the industries are burdened by high costs that may further result in permanently unprofitable industries. Regardless, the mere fact that government intervention can help solve the challenges brought about by market failure speaks volume of its necessity.
However, it is important to note that government intervention if also often present in other areas of economics which include intervention for greater equality and macroeconomic intervention. Intervention to ensure greater equality refers to the redistribution of both income and wealth to ensure the improvement of equality of opportunity as well as the equality of outcome. On the other side, macroeconomic intervention refers to influence aimed reducing unemployment and overcoming recessions. For one, concerning ensuring equality, it is important to note
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