Overview – Government intervention

In the demand and supply model, we saw how the equilibrium price is determined by the forces of demand and supply. While the equilibrium price ensures that the quantity demanded is equal to the quantity supplied, this does not imply that there are no unhappy market participants. Sellers prefer a higher price, while demanders prefer a lower price. These groups might put pressure on government to use its powers to either increase or decrease the price.

Intervention in the functioning of the price mechanism, especially by the government, has a long history. Governments have always tried to intervene in markets in order to change the outcome of the market. The main reason for the intervention is that governments believe – sometimes because of pressure from interest groups – that the outcome of a market is unfair or inefficient.

Governments might also believe that through government intervention, people can be protected from this unfairness and the efficiency of markets improved.