Cause and Effect of Government Intervention
Government intervention sounds like a scary term for people in the free market. In fact it is, but a market without government intervention is very rare. As we learned earlier this year about the free market, price is determined by quantity of demand and supply, but with government intervention, prices may be controlled, quantity of supply may change because of subsidies, and demand may change if tax is added on products. Intervention may cause the market disordered, and also leads to unwanted harmful consequences.
A several examples of government interventions are taxation, price control, and subsidizing. Tax is an amount of money placed on goods and services. Government makes a revenue by collecting money from the supplier, and the supplier collects it from the consumers (4). It is maybe the most direct government intervention consumers can feel since we pay tax for virtually all products we purchase. Price control happens when government sets a ceiling for a price of goods and services. Governments try to make goods and services more affordable to people by controlling prices (4). Subsidies are payments made by the government to a firm for the purpose of increasing the production of a good (4). This is done to increase consumption, support local industry, and support export (4). Besides the tax, government subsidies and price control may seem like a good idea for consumers, but these acts actually lead to effects that are unwanted and harmful.
In a free-market economy, prices help the allocation of resources to operate properly. When the quantity of supply curve meets with the quantity of demand curve, prices can be determined. Likewise, when supply or demand changes, price will change too. All this happens only when the market is free, which does not happen all the time. On the graph below, the example of price control is used to compare free and government intervened with supply and demand.
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