Answer: Government intervention refers to the regulatory action taken by a government that aims to change decisions made by individuals, organizations, or groups regarding economic and social matters. Its primary goal is to maximize a country’s social welfare by correcting market failure.
Step-by-step explanation:
1 – Price Controls
These are government regulations related to prices, wages, or their rates of change. A government may impose such regulations on a wide range of offerings. Alternatively, it can impose regulations on any market involving a single good. Price controls are of two types —
Price Floor – This is the minimum price one can charge for goods and services. It aims to safeguard suppliers.
Price Ceiling – This is the maximum price suppliers can charge for a product or service. Its purpose is to safeguard consumers by ensuring that the offerings are affordable for as many consumers as possible.
#2 – Subsidy
Subsidies are incentives that a government gives businesses or individuals through grants, tax breaks, or cash to increase the supply of specific goods and services. For example, it can be a payment to suppliers, enabling them to minimize their cost of production and increase their output. This, in turn, allows individuals to access products and services at a lower price, leading to an improved standard of living.
#3 – Tax
Taxes are the primary source of income for governments. They utilize taxes to fund various programs and repay debt. Moreover, a government usually utilizes the funds to increase economic capital by offering public goods, for example, trains, bridges, roads, national defense, etc. This economic capital is crucial for increasing an economy’s production capacity over the long term. Governments can impose taxes on taxpayers directly, for example, via income tax. Alternatively, they may impose taxes indirectly, for example, through value-added tax or sales tax.
#4 – Regulations
Regulations ensure that economic activities run properly. There are multiple government regulations, each of which impacts economic activity differently. Let us check out some of the different regulation categories.
Environment: For instance, governments launch multiple regulations concerning the environmental effect of business operations on the environment. The introduction of environmental safety standards is one example.
Employment: The government issues laws, rules, and regulations concerning fair recruitment, wages, and workforce safety and health.
Competition: Governments impose certain regulations, for example, mergers and acquisitions and antitrust regulations, to promote fair competition. Moreover, this category involves deregulation, for instance, eliminating the limits on foreign investors’ share ownership.
Consumer Protection: This category protects consumers from unfair practices concerning price rules, product descriptions, and safety and health standards.
Some other ways in which governments may intervene are as follows:
Raising or dropping interest rates: Governments increase or decrease interest rates to ensure liquidity and stability in the economy.
Bailouts: This refers to an injection of funds into an organization or business facing a potential bankruptcy threat.