The document discusses the effects of government intervention in markets. While governments intervene to address inefficiency and maximize social welfare, intervention often has the opposite effect. Common forms of intervention include taxation, which dampens the economy by taking money from consumers and businesses, and price setting/subsidies, which force consumers to pay higher prices. Though interventions aim to solve short-term problems, they cause long-term harm to the economy. The document argues that leaving markets free of intervention allows workers, businesses and resources to be allocated most efficiently to meet consumer needs. The government's role should be to protect rights and establish security, justice and arbitration systems rather than interfere in markets.

1. Understanding
Government Intervention &
its Effects on the Economy
By: Rakesh Wadhwa
www.wadhwarakesh.com

2. The Road to Hell is Paved with Good Intentions
Governments intervene in markets to:
 Address inefficiency
 Maximize social welfare
 Promote the well-being of consumers
 Product and encourage production
Unfortunately, government intervention has just the
opposite effects. Let’s understand how.
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3. Forms of Intervention that Governments Love
Government’s favorite ways of controlling businesses
and the economy include:
 Taxation:
Levying higher taxes on people with higher
incomes and firms generating higher profits
 Setting Prices and Offering Subsidies:
With the aim of helping the weaker sections of the
population
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4. Impact of Taxation
Taxes do generate funds for the government. However, here’s a very simple way to
understanding the dampening impact of high taxation on the economy:
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5. Impact of Setting Prices and Offering Subsidies
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6. The Double-Edged Sword
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Take away money
from the consumer
Force the consumer
to pay higher prices
Taxes
Price Setting
/ Subsidies

7. Causing More Problems Than It is Solving
 Government intervention comprises of short-term
fixes that cause long-term pain.
 Benefits are far outweighed by the negative effects
on the economy.
 Governments often make the wrong business
decisions, as they are influenced by political
pressure groups.
Let’s have a look at what can be achieved in the
absence of government intervention.
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8. Freedom to Maximize Gains
When the government does not interfere:
 Workers are most productive when they can
freely pursue their own economic interest
 Businesses strive to optimize the use of
resources, driven by a profit motive
 Resources are allocated to the production of
goods / services that consumers need or
desire
 A nation’s economy functions most efficiently
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9. Government Must Play its Role
In its role as a facilitator, the government should protect the rights of individuals and
businesses. This includes:
Government
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 Property rights
 Right to life and liberty
 Right to pursue one's dreams without impinging on
the rights of others.
The government must strive to establish:
 A justice system with strong emphasis on arbitration
and swift resolution of disputes.
 Security from both internal and external aggression
 An effective and corruption-free police force

10. Read More About Free Markets
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