Intervention

Definition

Intervention refers to actions taken by the government or other authorities to influence economic activities, particularly when addressing market failures like externalities. It often aims to correct inefficiencies that arise from these failures, ensuring that the social costs or benefits of economic activities are accounted for. By using tools like taxes, subsidies, and regulations, intervention seeks to align private incentives with social welfare.

5 Must Know Facts For Your Next Test

1. Intervention can take various forms, including taxes that increase costs for negative externalities and subsidies that lower costs for positive externalities.
2. The effectiveness of intervention depends on accurately measuring externalities and designing appropriate policies that correct market failures.
3. Government regulations may include setting limits on emissions or requiring permits, directly affecting how businesses operate.
4. While intervention can help achieve social welfare, it can also lead to unintended consequences, such as market distortions or inefficiencies if not carefully designed.
5. The debate around intervention often centers on finding a balance between government action and market freedom, with arguments for and against varying based on economic ideologies.

Review Questions

• How does intervention address market failures related to externalities?
  • Intervention addresses market failures by implementing measures that account for external costs and benefits that are not reflected in market prices. For instance, imposing a tax on pollutants encourages producers to reduce emissions, aligning their private costs with societal costs. Similarly, subsidies for renewable energy can promote positive externalities by incentivizing cleaner production methods. Overall, these interventions aim to correct the misalignment between private incentives and social welfare.
• Evaluate the potential advantages and disadvantages of using taxes as an intervention tool to manage negative externalities.
  • Using taxes as an intervention tool offers advantages such as providing financial disincentives for activities that generate negative externalities, like pollution. This can lead to a reduction in harmful behaviors while generating revenue that can be reinvested into public goods. However, disadvantages include the risk of over-taxation, which might lead to economic inefficiencies, or the difficulty in accurately determining the tax level needed to match the externality's social cost. Furthermore, taxes might disproportionately affect lower-income individuals if not designed equitably.
• Create a policy proposal for a new government intervention aimed at addressing a specific negative externality in your community, justifying your approach and expected outcomes.
  • To address air pollution caused by vehicle emissions in my community, I propose implementing a congestion pricing system during peak hours. This policy would charge drivers a fee for using major roadways at times of high traffic. The rationale is that higher costs would discourage unnecessary car trips and encourage the use of public transportation or carpooling. Expected outcomes include reduced traffic congestion, improved air quality, and increased funding for public transport infrastructure. The success of this policy could serve as a model for similar interventions in other cities dealing with pollution and congestion.

Related terms

Externalities: Externalities are costs or benefits that affect third parties who are not directly involved in an economic transaction, leading to market outcomes that do not reflect true societal costs or benefits.

Market Failure: Market failure occurs when the allocation of goods and services by a free market is not efficient, often necessitating intervention to improve outcomes.

Regulation: Regulation involves government rules or directives designed to control or influence economic behavior, often as a form of intervention to address externalities.