<–2/”>a >Undermining Markets: When Government Intervention Hurts More Than It Helps
Fact: Index of economic freedom is brought out by the heritage foundation. India wascategorized as ‘mostly unfree’ with a scoreof 55.2 in 2019 ranking the Indian economy129th among 186 countries, i.e., in thebottom 30 per cent of countries.
Fact: the Global Economic Freedom Index, which is brought out by the Fraser Institute, measureeconomic freedom as the freedom of choice enjoyed by individuals in acquiring and using economic goods and Resources.In the Index of Global Economic Freedom too, India ranks 79th among 162 countries with 108th rank in business regulation.
Concepts:Economic freedom enhances wealth creation by enabling efficient allocation of entrepreneurial resources and energy to productive activities, thereby promoting economic dynamism.
Economic freedom leads to :
- Per capita GDP increases
- Density of new business firms increases
- Improve Ease of Doing Business
- Positively corelated with Patents applied and patents Granted
- High Index of Innovation
Concepts : Indian economy is replete with examples where Government intervenes even if there is no risk of market failure, and in fact, in some instances its intervention has created market failure This may be partly due to the legacy of post-independence economic policies which the country followed.
Diagram of How government intervention creates problem following is the example of essential commodities act creating problem in wealth creation (Source Economic survey)
Flow chart for government intervention :
High prices of commodity —-à Excess amount of product for sale—à opportunity for producer —à Government Intervention-à Opportunity lost—àDead weight loss
Concept: How ECA interfere with the Marketing mechanism of agriculture produce`:
- It weakens development of agricultural value chain.
- It inhibits development of vibrant commodity derivative market.
- It reduces producer profit.
- It reduce incentive to invest in storage.
- It leads to increase in the price volatility which is against the consumer welfare.
Concept: Another issue with the Essential commodities act is that it does not differentiate between the genuinely need to hold stocks owing to the nature of their operation and firms that might speculatively hoard stocks.
ECA destroy or distort market by increasing uncertainty and hence ECA has lost its relevance.
Concepts: What should be done instead of above intervention/ or to have better marketing mechanism
- Effective forecasting mechanism
- Stable trade policies
- Increasing integration of agricultural markets
| Concepts: The regulation of prices of drugs, through the DPCO 2013, has led to increase in the price of the regulated pharmaceutical drug vis-à-vis that of a similar drug whose price is not regulated. The increase in prices is greater for more expensive formulations than for cheaper ones and for those sold in hospitals rather than retail shops. These findings reinforce that the outcome is opposite to what DPCO aims to do – making drugs affordable |
Concepts : There is negative correlation between increasing agricultural productivity and the amount of subsidy given. Instead focus should be on investing in agriculture Research and Development and Creation of agricultural intelligence.
Concepts:
| Government policies in the foodgrain markets has led to the emergence of Government as the largest procurer and hoarder of rice and wheat crowding out. This has led to burgeoning food subsidy burden and inefficiencies in the markets, which is affecting the long run Growth of agricultural sector. The foodgrains policy needs to be dynamic and allow switching from physical handling and distribution of foodgrains to cash transfers/ food coupons/smart cards.
Concept: Solution for positive Agricultural intervention · Incentivize diversification · Incentivize environmentally sustainable production · Direct cash transfer and direct Investment subsidies · Government should not decide the production and Cropping pattern · Conditional cash transfer on the line of Brazil and Mexico
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| Concept: Analysis of debt waivers given by States/Centre shows that full waiver beneficiaries consume less, save less, invest less and are less productive after the waiver when compared to the partial beneficiaries. Debt waivers disrupt the credit culture and end up reducing the formal credit flow to the very same farmers, thereby defeating the very purpose of the debt waiver provided to farmers.
Summary of the chapter: Government intervention are hurting more than they are supporting and hence time has come for transition from a command control driven economy to a market driven economy. Government need to move out of those sector which are less prone to market failure. The observation of government intervention does not give a positive picture of the result achieved. |
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The role of government in the economy is a complex and controversial issue. Some people believe that the government should play a limited role in the economy, while others believe that the government should play a more active role.
There are several arguments in favor of government intervention in the economy. One argument is that the government can correct market failures. A market failure occurs when the market does not allocate resources efficiently. For example, a monopoly is a market failure because the monopolist has the power to charge higher prices and produce less output than would be the case in a competitive market.
Another argument in favor of government intervention is that the government can promote economic stability. The government can do this by using Fiscal Policy (tax and spending policy) and Monetary Policy (interest rate policy) to manage the economy.
Finally, the government can redistribute income. This means that the government can take Money from some people and give it to others. The government does this through taxes and Transfer Payments.
There are also several arguments against government intervention in the economy. One argument is that government intervention is often inefficient. This is because the government is not always able to make decisions as efficiently as the private sector.
Another argument against government intervention is that it can lead to Corruption. This is because government officials may be tempted to use their power to enrich themselves or their friends.
Finally, government intervention can lead to a loss of individual freedom. This is because the government may regulate businesses or individuals in ways that restrict their choices.
The evidence on the effectiveness of government intervention is mixed. Some studies have found that government intervention can be effective in correcting market failures and promoting economic stability. Other studies have found that government intervention is often counterproductive and leads to economic inefficiency.
The evidence suggests that government intervention should be used sparingly and carefully. Government intervention should only be used when there is a clear market failure and when the benefits of intervention outweigh the costs.
In conclusion, the role of government in the economy is a complex and controversial issue. There are several arguments in favor of government intervention, as well as several arguments against it. The evidence on the effectiveness of government intervention is mixed. The best approach to government intervention is to use it sparingly and carefully, only when there is a clear market failure and when the benefits of intervention outweigh the costs.
What are the benefits of free markets?
Free markets allow for the efficient allocation of resources, the discovery of new products and Services, and the innovation that drives economic growth.
What are the costs of government intervention in markets?
Government intervention in markets can lead to inefficiencies, higher prices, and a decrease in innovation.
What are some examples of government intervention in markets?
Government intervention in markets can take many forms, such as subsidies, tariffs, and regulations.
What are the effects of government intervention in markets?
The effects of government intervention in markets can vary depending on the specific policy. However, in general, government intervention can lead to inefficiencies, higher prices, and a decrease in innovation.
What are some examples of the benefits of free markets?
Some examples of the benefits of free markets include:
- The efficient allocation of resources: Free markets allow for the efficient allocation of resources, meaning that goods and services are produced at the lowest possible cost and are distributed to those who value them the most.
- The discovery of new products and services: Free markets encourage the discovery of new products and services, as businesses are constantly looking for new ways to meet the needs of consumers.
- The innovation that drives economic growth: Free markets are the engine of economic growth, as they provide the incentives for businesses to invest in new technologies and to develop new products and services.
What are some examples of the costs of government intervention in markets?
Some examples of the costs of government intervention in markets include:
- Inefficiencies: Government intervention can lead to inefficiencies, as businesses are no longer able to freely allocate resources in the way that is most efficient.
- Higher prices: Government intervention can lead to higher prices, as businesses are able to pass on the costs of regulation to consumers.
- A decrease in innovation: Government intervention can decrease innovation, as businesses are less likely to invest in new technologies and products if they are subject to regulation.
What are some examples of government intervention in markets?
Some examples of government intervention in markets include:
- Subsidies: Subsidies are payments that the government makes to businesses, often in order to encourage them to produce certain goods or services.
- Tariffs: Tariffs are taxes that the government imposes on imported goods, in order to protect domestic industries from foreign competition.
- Regulations: Regulations are rules that the government imposes on businesses, in order to protect consumers or the Environment.
What are the effects of government intervention in markets?
The effects of government intervention in markets can vary depending on the specific policy. However, in general, government intervention can lead to inefficiencies, higher prices, and a decrease in innovation.
For example, subsidies can lead to overproduction, as businesses are able to produce goods or services at a loss, knowing that the government will make up the difference. Tariffs can lead to higher prices for consumers, as businesses pass on the costs of the tariffs to consumers. And regulations can stifle innovation, as businesses are less likely to invest in new technologies or products if they are subject to regulation.
Question 1
Which of the following is NOT a reason why government intervention in the market can hurt more than it helps?
(A) Government intervention can lead to higher prices.
(B) Government intervention can lead to lower quality goods and services.
(C) Government intervention can lead to less innovation.
(D) Government intervention can lead to more competition.
Question 2
Which of the following is an example of government intervention that has hurt more than it helped?
(A) The minimum wage.
(B) The Occupational Safety and Health Administration (OSHA).
(C) The Environmental Protection Agency (EPA).
(D) All of the above.
Question 3
Which of the following is an example of government intervention that has helped more than it hurt?
(A) The Federal Reserve System.
(B) The Department of Defense.
(C) The Department of Education.
(D) None of the above.
Question 4
Which of the following is the best way to reduce government intervention in the market?
(A) Vote for politicians who support free market policies.
(B) Contact your elected representatives and tell them you support free market policies.
(C) Support organizations that promote free market policies.
(D) All of the above.
Question 5
Which of the following is the best way to educate people about the benefits of free markets?
(A) Read books and articles about free markets.
(B) Talk to people about free markets.
(C) Attend free market events.
(D) All of the above.