Government Intervention in Economics

Trade across the free market is one of the fundamental ways in which the economic system of many countries can raise revenue and maintain our modern lifestyle, as well as boost business opportunities and international relations. That being said, the free market is subject to many government-imposed limits that, at first sight, limit the economic system even in the face of possible market failures. Why is this?
This article will explore why government intervention in the local economy and international trade is upheld, exploring subjects like property rights, monopoly power and more.

What are the most common forms of government intervention in international trade?
The following is a rundown of the different forms of regulatory action by the government in international trade.

Tariffs – Tariffs are taxation on imported goods to raise the price of these goods so market participants don’t opt to buy them instead of domestic goods. It also has the bonus of increasing government revenue.
Subsidies – Subsidies are a monetary benefit that comes in the form of cash grants, tax breaks, low-interest loans, state provisions etc. from the government to domestic producers. This increases competition potential in international markets, encouraging industry and creating jobs. It can also be done when correcting market failures.
Quotas – These are government-imposed limits on how much of an item can come into the UK. Once again, this is mainly done to protect domestic industry, sometimes at the cost of consumers, who may have to deal with lower supply, which often leads to high prices.
Bans/Restrictions – A more obvious form of intervention is the government-imposed limits, or outright ban, on the import/export of certain goods and their level of quality. This is done to protect consumers and national security. Refer to Gov.u k’s banned and restricted goods list for further information.
Export Controls – For reasons of security or compliance with foreign policy, governments may restrict the export of goods to other nations.
Exchange Rate Manipulation – Governments may impose a form of price control by changing the value of their currency. Usually, they do this by buying large amounts of their own, or foreign, currency, shifting its market value. That being said, this can have unintended consequences as it may be seen negatively by both domestic markets and foreign governments.

What are the advantages and disadvantages of these forms of government intervention?
The advantages are as follows:

Correction of Market Failures – When the free market fails to allocate resources with efficiency, market failure can occur. One main reason is negative externalities:

Negative Externality – A negative externality refers to the side effects products may have on the country. For example, a new drug that causes side effects. If it’s not worth banning, they can raise the minimum price of the drug to dissuade consumers.


Protecting Domestic Industry and Job Security – If a country has a high supply of a certain good, that good with likely end up shifting the market price of the good. This can crash domestic businesses. For example – domestic Japanese woodcutters lost jobs due to cheap wood being imported elsewhere during the country’s reconstruction post-WW2.
New Industry – If there is high potential in some local industries, employing a form of price mechanism to protect them until they develop into a force on the international stage would only help the country.
Trade Strategy – By affecting both minimum prices and maximum prices of certain goods, a country can leverage a competitive advantage in certain industries or negotiations with other countries.
Promoting Change – Contrary to negative externalities, positive externalities refer to goods with great side effects, such as renewable energy products. By using government intervention to affect the costs versus other products, they can reap the benefits of better products being brought into the nation.

The disadvantages of government intervention are as follows:

Market Distortion – Poor use of government intervention on the minimum and maximum price of goods can create fluctuations in the market, resulting in higher prices, reduced innovation etc.
Foreign Dispute – Countries may be prompted to respond with countermeasures or punishment, disrupting global supply chains and hindering cooperation.
Rent Seeking – When intervention goes wrong, it can prompt special interest groups to lobby for policies that benefit them, leading to corruption.

Economic Price Controls and Other Methods
Intervention in markets sometimes goes beyond trade regulations to address domestic market failures and promote the welfare of the public via price controls – such as imposing higher or lower price ceilings and price floors. This can ensure the affordability of essential goods and services, protecting consumers from high prices during times when it’s impossible to increase supply or meet high demand.
Nonetheless, this can backfire. For example, adjusting the price ceiling can lead to shortages and black markets, whereas price floors can lead to oversupply, waste of resources and increased costs.
Beyond messing with the price mechanism, there are other ways in which the government can help the public.

Taxes and Subsidies – Taxes on goods with negative externalities, such as demerit goods, can increase external costs. This can discourage consumption and production. Merit goods, however, such as healthcare, are instead encouraged to overcome market failure and increase the positive externalities of the trade.
Public Provision – Providing public goods, public transport, and street lighting out of the government’s pocket in the face of correct market failures within the private sector can offset bad decisions or unavoidable consequences in the international market.
Information Provision – The information governments have on the global market is typically better than anything an A-level economics master can come up with, as they must know for the continued prosperity of the domestic market, enabling businesses and consumers to make informed decisions.
Regulation – Regulations can be put in place to address a market failure caused by inadequate competition, externalities or information asymmetry in the interest of public policy, such as mandating accurate food packaging.

Government Intervention versus the Free Market
The domestic health of the markets is tied heavily to the well-being of the public. Whilst it may seem more prudent to dispense with changing the minimum price, or maximum price, of goods and services whilst instead pushing for cheaper goods on the global market, it’s risky.
Global Trade is a tool used to benefit a nation and its people, but relying on it means being powerless in the face of geopolitical issues you have no influence over. Furthermore, having completely open trade with no regulations means risking bad actors entering the market. For example – regulations on food have been put into existence to protect consumers. It’s entirely due to government intervention that poisonous materials are kept out of food and drink.
So where’s the line between freedom and protection? The line is the very policies we’ve overdone To assign something demerit goods means increasing taxes or heightening minimum prices. This serves two purposes, A: protection, and B: taxation.

Conclusion
Overall, government intervention is necessary. Without it, both market failure domestically and internationally becomes a high possibility. It should be balanced as all things should – with reason. Limited government intervention is great for some, but bad for others. Regulation is what keeps arsenic out of candy, and ensures other industries less developed have a chance to thrive. 
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