Market intervention definition
Market intervention is any action taken by a government or other political-action group to modify or adjust the market. Market intervention through monetary policy is a common tool used by governments to regulate markets. Governments mainly intervene in markets by setting interest rates, subsidies and tariffs, and industry regulations.
How can government intervention correct market failure?
Governments will directly intervene when there is a lack of equilibrium in a free market caused, often caused by an inefficient distribution of goods and services. Government intervention into the market most often occurs in several ways:
- New legislation: Governments constantly amend and pass laws in a number of ways to correct and prevent market failures. A prime example is federal governments passing antitrust legislation that aims to protect consumers from predatory business practices and promote fair marketplace competition
- Taxes: Governments may change tax laws to raise or lower the price of goods and services in an effort to increase or reduce demand
- Tariffs: Tariffs are taxes imposed on imports of one country by another country to either protect domestic industries, raise revenue, or exert leverage over another country
- Subsidies: A subsidy often takes the form of a direct payment or a tax cut from the government to a business or corporation in return for those companies to alter their performance in a way that helps correct a market failure
- Trade regulations: Governments can also pass nontariff trade barriers that restrict trade with certain countries or foreign companies without directly imposing tariffs or duties