Government intervention in the market is required to correct market failures, ensure equitable distribution of income, protect the welfare of citizens and increase economic growth.
Government intervention may take various forms. One of them is legislation and regulation of the production and supply of some products and the behaviour of firms.
The provision of goods and services by the government can be either beneficial or harmful, depending on the quality of the services provided . Public goods are one area of state intervention which has the approval of economists and citizen alike.
Fiscal policy intervention may be in the form of indirect taxes to reduce demand of goods with negative externalities, subsidies to increase demand and supply of goods with positive externalities, tax reliefs to promote research and development or increase employment, taxation policy and welfare programmer to influence overall distribution of wealth.
Government intervention may also be necessary to reduce the information gap among consumers and producers. These include compulsory labeling of warnings on cigarette packages, correct listing of ingredients of food items, public awareness messages in the mass media.
While some forms of government intervention have social benefits, in some instances they may have a negative outcome. This occurs because of a sense of complacency in government-run services and a lack of motivation to improve efficiency in production.
Inadequate or poorly managed government services create an opportunity fro the private sector to provide better quality services but at exorbitant prices.
The Keynesian school believes government intervention is necessary to correct market failure. The Classical school is willing to accept government intervention in a limited capacity, primarily to provide public goods.
AT the other extreme is the Austrian school which advocates a completely free market and believes the government’s role is to protect this freedom.