In today’s article, we will cover why Governments exist, what they aim to achieve and their methods of government interventions in markets, focusing on microeconomics. To start, do you guys know the reasons why governments intervene?
To consolidate this question, we first need to understand and define different methods the government can intervene in, which are price controls (maximum and minimum price), indirect taxes, subsidies and legislation… A maximum price is set below equilibrium to aid consumers by making goods more affordable, while a minimum price is established above equilibrium to protect producers. Indirect taxes are levied on spending to increase prices, and subsidies involve monetary payments to producers, reducing production costs and lowering prices. Although we won't delve into each method deeply today, future articles will cover them extensively.
Now, returning to our initial question, governments intervene for several reasons. Firstly, the Government intervenes because they want to earn revenue. When indirect taxes are placed on goods, the government receives revenue when their goods are purchased. The revenue earned can then be invested in things like infrastructure projects which can benefit the citizens!
The next reason is to support domestic firms. Minimum prices and subsidies offer support to small firms to encourage competition within markets. These supports can also be given to industries that employ a large proportion of people or industries that involve producing goods beneficial for the whole society.
Thirdly, to provide support to households on low incomes. Maximum prices and subsidies can help lower-income households that are unable to meet basic needs such as food, shelter, and clothing by making these goods lower in price so that they are able to purchase them.
Another crucial role of government is to influence the consumption level of consumers. Governments often encourage the consumption of goods which have value for society, such as education, and healthcare through the use of subsidies or provision of the goods for free or making consumption mandatory. Conversely, goods that are deemed harmful to consumers and society like alcohol and cigarettes are discouraged from consumption by the implementation of indirect taxes and legislation such as negative advertisement.
Last but not least, to correct the market failure. The examples above are all examples of market failure. This is when there is an over or under-allocation of resources that doesn't maximise the efficiency of the society.
Finally, to promote equity (equality), meaning to achieve fair, equitable distribution of wealth and income through taxation policies and supporting low-income earners with direct cash payments.
By understanding various purposes for government interventions, this topic allows you to critique different governments and helps us appreciate the vital role that governments play in shaping our economic environment!
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