Question

What are the possible reasons why the government may make a market intervention? What are the possible implications of such interventions? How might the wedge between consumers and firms lead to market distortions?

Answer 1

The possible reasons for the government intervention in markets

To promote economic fairness, to see that there is growth in the economy , to stabilize prices if they are highly charged, to avoid price discrimination practice, to maximize social welfare etc.

Government intervention is that they keep price ceiling, price floors , taxation , subsidies etc . There are many instances due to government intervention the market failure took place which effected the economy. So government should consider all possible outcomes while interfering.

When there are price ceiling or price floors in the market most the cases the government will keep the price below the equllibrium price. Thus the consumer will demand more where the supply will be scarce which leads to market distortion.

Even due to taxation the consumer will demand less and there will be an excess supply which again leads to market distortion.