Why Do Governments Intervene?

Topics: Economics, Market failure, Macroeconomics Pages: 2 (410 words) Published: September 3, 2009
The Australian economy is a mixed economy because it relies on a mixture of the market mechanism and the government to co-ordinate market activity. Generally, the market is considered to provide the best economic outcomes for a society in most circumstance. However, there are certain situations in which the market fails to deliver efficient outcomes and the involvement of the government is necessary. The government sectors perform two basic tasks:

1.Provision of the Legal Framework - the government’s lawmaking ability allows it to influence and control the private sector. This ability allows it to pursue economic, political and social objectives.

2.Provisions of goods and services - the importance of the government sector in Australia are reflected in its contribution to employment and expenditure.

Why do Governments Intervene?
(Free markers do not always deliver the most desirable and economic outcomes) 1.Market failure in providing goods and services
Public Goods (not provided by the market but benefit all society) •No income for private sector provide these goods because non-profitable •For some goods consumers do not pay for all their cost

Benefits may be different to price in a market e.g. who and what to pay for street lighting •Merit Goods - benefits go beyond those who pay e.g. health care system •Natural Monopolies – efficient only if provided by one supplier (govt.) because of cost of infrastructure e.g. rail track

2.Market Instability
Maintains economic growth
Economic stabillation – major priority of govt. through macroeconomic policies such as fiscal and monetary policy •Recession – severe downturns in economic activity increase unemployment and reduce profit •Boom Periods – excess demand leads to inflation

Cycles of boom and bust cause significant economic problems

3.Market failure in accounting for externalities
The costs or benefits of productions not allocate the market •Positive impacts not...
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