Government Intervention

In Unit 4, you will study the ways in which the Australian government intervenes in the economy. However, before you study how they intervene, it is important to understand why.

In Unit 3, you have studied the various goals that the Australian government works towards. Policies are implemented to help us achieve those goals. However, in studying those policies you have worked extensively with the market mechanism. The market mechanism is based on a range of assumptions, such as:

There are many buyers and sellers in the market
The available resources are perfectly interchangeable - we can use them to make whatever we want
Goods and services can not be distinguished by any quality other than price
Participants have perfect knowledge of all aspects of the market
There are no barriers to enter or exit any market
The Government does not intervene in the free operation of the market

It is significant that the final point is being ignored as soon as the government chooses to intervene in any way. In choosing to intervene in the Australian economy, the government is ensuring that we will never have a "perfect" market. Despite this, many other actions that the government takes seem to be efforts to work towards this impossible goal. As such, we need to understand why it is that this approach has been adopted.

The key to understanding why this intervention takes place is the fact that, as we are already aware, left unchecked the market will fail. In Unit 3, you will have studied several different types of market failure, including:

Market Power - Some firms will develop strength that will allow them to over ride the free market and manipulate the price. Examples include monopolies, oligopolies and duopolies.
Asymmetric Information - There are often situations where two people enter a transaction, and one person possesses more information than the other.
Public Goods - Some things will not be produced by the free market, even though they are needed. This is because we can't exclude people who don't pay. Examples include defence, street lights and lighthouses.
Externalities - Some forms of production lead to side effects which are not controlled by the market. They can be either positive or negative.

The Australian government has three broad goals in mind when they are implementing any sort of policy. We can say that they are trying to achieve one (or more) of these three things:

Stabilisation
Allocation
Distribution

Like all market economies, the Australian economy goes through the fluctuations associated with the business cycle. Stabilisation refers to the desire of the Australian government to minimize the size of these fluctuations. When a trough gets too low, it becomes a recession, and that will lead to excessive unemployment. When a peak gets too high it becomes a boom, and that will lead to inflation. Through the process of stabilisation the Australian government hopes to minimize these negative side effects.

We already know that when left unchecked, certain resources will be allocated inefficiently. Market failure implies that externalities will result, and some public goods and services (such as roads, street lights and public parks) may not be produced at all. As such, the Australian government will intervene to ensure that the allocation of resources is more efficient than it would otherwise have been.

Finally, it is apparent that a freely operating market economy will also lead to an inequitable distribution of income. Through budgetary policy, the Australian government will seek to tax high income earners so that they can pay transfer payments to those in need – they will redistribute the income so that it is more equitable than it would otherwise have been.