Explain Why Governments Intervene in a Market Economy

Governments intervene in the market economy to resolve the limitations of the operation of the free market. Market failure occurs when the price mechanism takes into account private benefits and costs of production to consumers and producers, but it fails to take into account indirect costs such as damage to the environment, Governments intervene in the provision of goods and services, inequality on distribution of income externalities and the environment, monopoly power, and fluctuations in the economic activity.

Public goods will be undersupplied in one of the areas of a market economy due to market failure. A public good is a good which once provided, is difficult to prevent anyone from using. Public goods are non-excludable and attracts free riders who benefit from it without contributing to the cost.

The government have a role in providing merit goods. Merit goods include education and health care, and they are not produced in sufficient quantity by the private sector. The governments intervene by operating most hospitals and providing financial support.The governments intervene in this area because society doesn't understand the value of education, and it is not prioritised by the population. Governments want to have a higher education generation and economy, as it will lead to faster financial growth. A more educated economy will benefit the government because the population will bring more long run benefits.

For items that bring harm to the community- demerit goods, such as tobacco, alcohol and addictive drugs, the government's place heavy taxes, prohibition, and pacing an age limit for certain products. This is because demerit goods cause harm to personal health, and it causes a lack in economic growth and stability due to the amount of people addicted to these goods.

Free markets tend to produce substantial inequality in the distribution of income. Particular groups within Australian society that are susceptible to inequality and poverty. These disadvantaged groups include those