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Why Governments Step into Markets
Definition
Government intervention
When a government alters the resource allocation that markets would have achieved working freely on their own.
- A free market sets its own price and quantity, and governments step in to change that outcome.
- There are seven main reasons, and the rest of the article takes them one at a time:
- Earn revenue, mainly through taxes, to fund public goods and services.
- Support firms, helping small producers compete or nurturing future industries.
- Support low-income households, so everyone can meet basic needs.
- Influence production, so output matches wider social goals.
- Influence consumption, nudging buyers toward merit goods and away from demerit goods.
- Correct market failure, where the market over- or under-produces.
- Promote equity, sharing resources more fairly.
Earning Government Revenue
Definition
Indirect taxes
Taxes levied on spending on goods and services. They are called indirect because while consumers contribute to part or all of the tax, it is the suppliers (firms) who collect and transfer these taxes to the government authorities (consumers pay the taxes indirectly).
Definition
Direct tax
Tax paid to the government directly by the taxpayer (individual).
- Governments fund public goods and services by taxing market activity, through two kinds of tax.
- Indirect taxes are charged on spending and collected when goods are bought.
- The two main ones are VAT, a percentage on the value added at each stage, and excise taxes, fixed charges often placed on demerit goods.
