Rationale for Government Intervention

Rationale for Government Intervention

1. Three main reasons for policy intervention~

   • 1 To correct for insntances of market failure
     • 2 To achieve a more equitable distribution of income and wealth
       • 3 To improve the performance of the UK economy both domestically and on the international front

2. The free market...

   • Scarce resources are allocated through the price mechanism where the preferences and spending decisions of consumers and the supply decisions of businesses come together to determine equilibrium prices
     • The free market works through price signals
       • If demand is high, potential profit from supplying increases, leading to an expansion in supply to meet rising demand from consumers
         • The government may choose to intervene in the price mechanism on the grounds of wanting to change the allocation of resources and achieve what they perceive is an increase in economic and social welfare