2. INTRODUCTION
GOVERENMENT INTERVENTION-DEFINITION
Regulatory actions taken by a government in order to affect or interfere
with decisions made by individuals ,groups or organizations regarding
economic and social matters.
One of the features of modern business is the increasing involvement of
the government in business activities.
As of today ,there is no country in the world where the government of
the land does not interfere, in one form or the other ,in its economic
activities.
3. GOVERENMENT INVOVEMENT IN BUSINESS-
HISTORICAL PERSPECTIVE
State intervention in business seems to be as old as business itself.
Even in days of laissez –faire,which apparently shunned state
intervention ,the governments role in the economy was almost incapable.
The laissez faire doctrine ignored the fact that industrialization had
always operated in an economy whose orderliness are guaranteed by the
government.
Entrepreneur always may have considered his property as belonging to
him by virtue of divine right, or as reward for his virtue ,or as the
outcome of a natural economic law, but it was only the government
which could guarantee him continued possession and use of his property.
4. As years went by .state intervention became a historical necessity particularly after the
industrial revolution of the late 18th and early 19th centuries.
The era of industrial revolution witnessed in humanity of man to man and brutalization
of human nature in those very countries, and in those very societies where the greatest
advances were being made in the fields of science ,technology and organizations.
Affluence and poverty ,distress and luxury ,and exploitation and helplessness became
so juxtaposed that the need of state intervention began to be felt much more than even
before.
Then came the first world war, which confirmed the inevitability of state intervention in
economic activities.
In 1944,when the world war was still in progress, the department of planning and
development was set up.
A new industrial policy was announced by the government and the viceroy ,lord
wavell,declared in 1945:”government has decided to take positive steps to encourage
and promote industrialization of the country to the fullest extent possible.”
Positive steps were taken such as industries like iron and steel, machine tools, heavy
chemicals and the like, which would lay the foundation for future economic
develpoment,were set up.
5. REASONS FOR STATE INTERVENTION
•Modern economy should be a planned economy.
Government is the only agency which can plan and execute.
•Our constitution binds the government to take an active part
in economic activities.
•What the people and the country need can only be
understood and provided by government and not by
privatization.
•State participation is necessary to lay a strong base for the
future development of industry and commerce.
6. REASONS CONT….……..
• State intervention is necessary to eliminate poverty.
• Finally, the failure of market invites governments
intervention in an economy.
Market fails because of three reasons:
1)Externalities
2)Public goods
3)Information problems
7. EXTERNALITIES-Externalities are costs or benefits that the
market transactor imposes on third parties without there consent.
The most frequently used example of a negative externality is
pollution, resulting from either the manufacturer or use of some
product ,which impose costs on the individuals who neither produce
nor consume the product in question.
PUBLIC GOODS- Pure public goods such as defense ,law and
order and environmental protection cannot be provided by private
sector alone, because everybody shares their benefits automatically,
no one willing to pay them individually. But government can
provide them and impose their cost on tax payers.
INFORMATION PROBLEM- Imperfect information on the part of
either consumers or providers may make markets fail.
8. TYPES OF CONTROL
NATURE APPROACH SPREAD EFFECT ON EFFECT
COMPETITION
FORMAL COERCIVE DIRECT MAKE PROMOTIONAL
COMPETITION
WORK
INFORMAL INDUCIVE INDIRECT SET STANDARDS REGULATORY
FOR COMPETITION
SUPPLEMENTARY
COPMETITION
9. FORMAL AND INFORMAL CONTROLS
FORMAL CONTROLS: Formal controls are usually emanating from
legislation, for example: The FEMA,The Companies Act1956 and
Competition Act 2002.
INFORMAL CONTROLS: Informal controls refer to the controls which
various groups impose upon themselves out of need and custom.
COERCIVE AND INDUCIVE CONTROLS
COERCIVE CONTROLS : Coercive regulation require performance of
certain actions or refraining from others in order to avoid penalties.
For example: taxes must be paid or imprisonment may result.
INDUCIVE CONTROLS :Inducive controls hold out a promise of reward for
compliance with desired line of action.
For example: subsidies may be granted to stimulate certain activities.
10. DIRECT AND INDIRECT CONTROLS
DIRECT CONTROLS: When government fixes prices of certain
products or service it is a direct control
For example :The administered price policy of the government of India is
a direct control measure.
INDIRECT CONTROL: The variation of corporate income tax to
influence economic activity is an indirect control measure.
PROMOTIONAL AND REGULATORY CONTROLS
PROMOTIONAL CONTROLS: promotional measures are of a positive
in nature, and includes such activities as expansion of public sector
establishment and operation of development banks, encouragement to
small scale units, provision of incentives etc.
REGULATORY CONTROLS: Regulatory measures ensure orderly
development of industries with least wastage of resources.
11. A GOOD CONTROL SYSTEM
1)It must be democratic. This means that it must be exercised in the
interest of the governed as they see their interest.
2)It should know what it wants.
3)It must be efficient ,and at the same time it must not destroy the
efficiency of the thing it is regulating .
4)Control must be guided by experience or by wise experiment.
5)It must have a wider vision and canvas to develop. It must look beyond
the immediate effect of leading people to expect it in the future.
6)And lastly, the duties imposed must be simple enough to be
understood. ….
12. DISADVANTAGES OF INTERVENTION
1) One of the major areas in which the government intervenes is in the agricultural
sector of the economy. The government has three ways it can intervene and help its
producers. These ways include price policies, direct payments, and input policies.
Price policies have the largest effect on producers. Tariffs, quotas, and taxes are just
a few examples of price policies. While these policies bring revenue into the
government, in the end they hurt consumers. Each of these policies raise the prices
of both imported and native goods. They are designed to help stabilize prices and
give the native producers a chance to compete with foreign goods.
2) The use of taxes is one of the government‟s favourite ways to make its presence
known in the economy. While this method seems blatantly obvious, many of the
ways the government uses the money collected by taxation is not. Some of the
money it takes is used to fund other programs designed to “protect” consumers and
to “create” jobs. Because of the money taken away from the consumer through
taxes, there is less money movement in the economy. This money movement is what
creates jobs in the economy. “So, each person‟s money lost to taxes helps fail to
create their part of a job”.
13. 3) The use of tariffs is another way that government intervenes in the business sector.
They help inefficient domestic producers by forcing consumers to pay unnecessarily
high prices for imported goods. The use of tariffs forces people to pay higher prices for
certain goods and thus resulting in less money the consumer has to spend on other
goods and services. This results in less employment in the industries that produce such
goods and services.
4) Small and big businesses are guilty of inviting government intervention in the free
market. They continually ask the government to step in and “protect” them. Small
businesses ask for less regulation on small business and more regulation on big
business. Fair-pricing laws are a way both large and small businesses keep the
government involved and hurt the consumer. These laws keep prices high and hurt
efficient competitors.
14. WHAT SHOULD BE THE FORM OF STATE
INTERVENTION?
There are many ways in which intervention can take place – some
examples are given below:
Government Legislation and Regulation
Parliament can pass laws that for example prohibit the sale of cigarettes
to children, or ban smoking in the workplace.
The economy operates with a huge and growing amount of regulation.
The government appointed regulators who can impose price controls in
most of the main utilities such as telecommunications, electricity, gas and
rail transport.
15. Intervention designed to close the information gap
Often market failure results from consumers suffering from a lack of
information about the costs and benefits of the products available in the
market place. Government action can have a role in improving
information to help consumers and producers value the „true‟ cost and/or
benefit of a good or service. Examples might include:
•Compulsory labelling on cigarette packages with health warnings to
reduce smoking
•Improved nutritional information on foods to counter the risks of
growing obesity
•Anti speeding television advertising to reduce road accidents and
advertising campaigns to raise awareness of the risks of drink-driving
•Advertising health screening programmes / information campaigns on
the dangers of addiction
16. Public goods
Pure public goods such as defence ,law and order and environmental
protection cannot be provided by private sector alone. because
everybody shares their benefits automatically, no one willing to pay
them individually. But government can provide them and impose their
cost on tax payers.
Externalities
Good with positive externalities benefits, are worth more to society
than to any one consumer. Public health and education for example
,reduce infection rates, raise productivity etc.markets tend to
undersupply these goods ,and complementary funding or provision can
therefore improve efficiency,Simalarly markets ignore negative
externalities ,such as industrial pollution ,regulation to curb or clean up
the activity causing the pollution can improve social welfare.
17. CONCLUSION
It may be stated that the role of government in future must be redefined
but not ended.
The redefinition must be in the direction of improving quality of
intervention.
John Maynard Keynes once said. 'the important thing for government
is not to do things which individuals are doing already and to do them
little better or a little worse :but to do things which at present are not
done at all.”
What is not done till now is the improvement of the social sector
:primary education, health ,housing, nutrition and the like.
Let the government concentrate on these areas.