Definition: Governmental intervention is the intentional interference of a government in a country’s economic system through regulatory actions. It refers to a situation when a government is actively affecting decisions taken by individuals or organizations.
What Does Government Intervention Mean?
Government intervention is needed because of the so-called market inefficiencies and failures. With the purpose of increasing welfare or pursuing certain economic and social goals, a government designs and enforces rules that aim to obtain results that could not be obtained under a market that is entirely free.
The means employed for an intervention are various but they can be grouped in three broad categories. These are subsidies, taxes and regulations. Subsidies try to increase the consumption of certain goods or services above others. For example, a subsidy to milk could intend to raise milk intake in less privileged society sections.
In contrast, taxes try to diminish the use or consumption of something by increasing its relative price. An example could be a tax on alcoholic beverages. Regulations limit certain activities or behaviors considered as not desirable but also might have the purpose of offering goods and services that are not properly provided by the market. A case can be public schools in poor neighborhoods to increase enrollment among less-affluent children.
Since a perfectly free market is the most efficient way to allocate resources, excessive or inappropriate government intervention tends to distort efficiency in a significant extent. Governments might have political instead of public interests when making regulatory decisions. The government could also be inadequately informed or technically incapable to solve complex problems.
For example, a regulation to lower consumer prices of canned food sound like a good thing for poor people but if prices are insufficiently attractive to food suppliers whose main reason to exist is profit those products will not be offered at all. At the end, the desired solution would not be possible and instead, the population would face scarcity.