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How and why should states intervene in the market economy? What are some of the arguments in favor of and against state involvement in the economy?

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The extent to which governments intervene in the national economy is the issue which most clearly defines political leanings. Whilst there are a number of other social issues which contribute towards the distinction between left and right wing, state intervention in the economy remains a major distinction.

Those on the...

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The extent to which governments intervene in the national economy is the issue which most clearly defines political leanings. Whilst there are a number of other social issues which contribute towards the distinction between left and right wing, state intervention in the economy remains a major distinction.

Those on the "left," who favor economic intervention, would argue that unregulated free market capitalism is inherently unfair and leads to inequality. They believe that in a capitalist, free-market system, it is inevitable there are both winners and losers and that state intervention is essential to address imbalance and avoid poverty and hardship.

This intervention would take place in numerous ways, and is part of what's known as the redistribution of wealth. Public services for example, such as universal healthcare, ensure that anybody who "loses" under capitalism receives a level of support from fellow citizens. Likewise, a progressive taxation system ensures that money is redistributed from the more affluent citizens back to the country at large to ensure a level of equity between citizens.

State intervention can also take place in the form of regulation. Critics of purely free markets believe it's sometimes important to intervene in order to prevent dangerous or damaging practices. In recent years, the banking industry has been in focus, with critics arguing strong government regulation should be in place to prevent further financial crises which risk the health of the world economy.

The aim of this more egalitarian approach is to elevate all citizens and ensure the proceeds of a successful economy are at least somewhat shared amongst the population.

Those on the "right" however believe that state intervention stifles competition and markets should be as free as possible. They argue that low taxes and the removal of barriers to trade promote entrepreneurship and enable economies to flourish. In terms of taxation, it is argued that by intervening less and letting people keep more of their own money, they will have a greater inventive to work harder and therefore lift the economy for all. They will also have more money in their pocket to spend and would potentially be able to invest it or start their own business.

Those against intervention also tend to disapprove of state-run industries and services, which they regard as costly and inefficient. They argue that the nature of these industries makes them inherently wasteful and inefficient, whereas the profit motive drives the private sector to continually improve. They would also argue that it would be desirable to bring existing state run industries into private ownership through a process known as privatization.

The issue of market intervention has been clouded in recent years. Economic turmoil in the banking sector has led several national governments, including conservative governments, to intervene in the market to prevent their collapse. This is at odds with the traditional view of capitalism which states that businesses must be allowed to succeed or fail based on their own merit.

In reality, every national government intervenes in the market somewhat, but the argument in virtually all modern countries is how to do this and to what extent.

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There are no true free market economies in the world today, meaning in every nation the government intervenes at least somewhat in the economy. There are numerous reasons why this intervention occurs, but the main goals of government intervention in what would otherwise be a free market economy are to reduce inefficiency and to correct what are referred to as "market failures." Market failures essentially occur when resources are not allocated (distributed) efficiently. A common example of addressing a market failure is seen in public goods. For example, the government often provides public goods like roads. If the government left it up to private firms to provide roads, a number of problems could occur. In order to pay for the roads, firms would likely make people pay tolls in order to use them. In addition, the firms would only have the incentive to build roads in highly populated areas where they would get a lot of use, meaning more rural or sparsely populated areas would not have roads. Firms also might not bother maintaining the roads or holding them to certain standards, or firms could create monopolies, controlling the entire market for a good. When monopolies exist, there is a reduction in consumer choice, a rise in prices, and a decrease in innovation, as people are less willing to invent new products or services that may not be able to compete with the monopoly.

Another reason why the government intervenes in the economy is to protect consumers. When companies and firms are unregulated, they might cut corners or provide unsafe products in order to reduce costs. The government therefore sets certain standards and regulations in order to protect consumers. For example, the Food and Drug Administration ensures that food, prescription medications, vaccines, tobacco products, medical supplies, and supplements are safe for Americans or contain proper warning labels. Some dislike or argue against government regulations because they often make it more expensive and/or time consuming for firms to produce products.

Governments also attempt to make the economy more equitable and beneficial to all. Governments collect taxes and redistribute wealth by providing welfare programs such as Social Security, food stamps, or unemployment insurance. Taxes also help fund public goods like roads, schools, and parks. While the idea of a tax itself is not often controversial, the amount and use of the tax revenue often become big points for debate. Some argue that taxes should be reduced and that the government should provide fewer services, while others argue that the government needs to be more active in promoting the welfare of its citizens and providing services.

Historically, during wars, governments have also intervened in the economy in order to conserve and allocate resources more effectively. For example, during WWII, the government enforced rationing of critical materials like food, oil, and rubber, limiting how much individuals and families could purchase.

Governments can also set price floors or ceilings. A price floor sets a minimum price for a good or service. The minimum wage is an example of a price floor—the government sets a minimum standard for what employers must pay workers, thus ensuring more stability and equity for workers. However, a downside to a price floor is that it creates a surplus—there is a greater supply (in this case more workers) than there is demand (jobs).

In contrast to price floors, governments can enact price ceilings. Price ceilings function as the opposite of price floors—they set a maximum price for a good or service. For example, the rent controls in cities like New York are price ceilings. The government sets maximum rent prices because otherwise housing would be too expensive for too many people. This action has the effect of creating a shortage—there is a greater demand (for housing) than the supply (of houses/apartments).

Finally, governments can reward or discourage certain behaviors. For example, governments might offer incentives like tax breaks or subsidies (payments) to companies that meet certain environmental standards. The government can also use subsidies to help certain industries remain profitable or competitive. For example, the US government subsidizes (pays) certain farmers not to farm in order to keep the supply of certain agricultural products low. If the supply gets too high, as it did in the 1920s, prices fall to low and many farms fail. Critics of this policy believe that the government should not be involved in keeping certain industries or producers competitive and should instead let them fail. The government can also use taxes to discourage particular behaviors. Excise taxes (also known as sin taxes) are taxes on certain products such as alcohol or tobacco. The government's purpose in levying excise taxes is twofold: it creates another source of revenue for the government and it attempts to limit how much of an unhealthy product people consume or use. Again, critics of excise taxes argue that it is unnecessary government intervention and that it targets lower classes, as these taxes have greater effects on lower incomes.

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