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Advantages and Disadvantages of Government Intervention

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Published: Thu, 18 Jan 2018

Government intervention is one of the hottest topics to the economists. Some of economists say government intervention can recover market failure and prevent worse situation from neglect. On the other hand, there are some arguments that government intervention can reduce the efficiency of market. Both of ideas can make sense. Government intervention can improves the operation of market but it is not always applicable. Now, we will focus both positive side and negative side of government intervention. There are so lots examples about this topic and we will discuss about it.

First of all, the government needs to intervene to the market for fair distribution of wealth. If the society is unstable because of distribution of wealth, it affects negative effects like strike, unemployment and even crimes. It does not give good market environment to everyone. However, government can manage this situation by intervention such as policies. We can focus on two items for this topic, “Education” and “Healthcare”. Education has big relationship with job opportunity and income. Let’s look at the below table which is reported by the Infoplease (2013).

Median Annual Income, by Level of Education, 2000–2010 (U.S) “quotation” (Infoplease, 2013)

NOTE: Year-round, full-time workers 25 years and older. (—) = not available. (U.S Dollar)

This table shows us the average of annual income is quite different between the people who received low level of education and high level of education. U.S is a typical country of using free economic system. If some universities hope to raise their tuition fee to get higher income and to reinvest their universities, they can do it. However, the economical weak cannot apply the universities because of the high cost. If there is no any policy to solve the problem, the problem would be worse. The people who have enough money can send their children to the expensive elite private universities, but poor people even cannot give chance to apply the universities because of the cost. Since 1965, U.S government expands student loan policy for the student. They suggest loan with less interest or give scholarship to the students who is applicable their requirements. Even the policy still has some criticisms like low refund rate; lots of U.S students have used this policy to help graduating their universities.

We can focus on South Korean Medicare policy as an example of government intervention for fair healthcare from their National Health Insurance System. According to NHIS (2013), Korean Medicare insurance law was established in 1963 to give health benefits to national people. There are two types of medical insurance in Korea. One is employee health insurance and the other is community insurance. Employee health insurance (workplace insurance) can apply to the family of employee. It means if one man is hired in a company, then the rest of his family is applicable for the medical insurance benefits. In addition, the amount of insurance fee is divided by half for the employee and the company. So it does not have big financial burden to household. For the people who does not have job, they can receive medical insurance benefits from community insurance. The autonomous communities search the people who do not register occupation and register them to community medical insurance automatically. The entire insurance fee is set by the amount of property and income, so upscale pays more and downscale pays less. With medical insurance, patients bear only 30% of hospital expenses. Hospitals register the medical records and receive the rest of 70% from government. Korean government charge medical insurance tax to cover the receiving money to hospitals and medical institutions. So all of Korean people get medical benefits from most of basic illness and we can use this example as a government intervention for equitable distribution of healthcare. From the two examples of Korea and U.S, we can know how government intervenes for equitable distribution of income and wealth. It will gives good effects to the market such as good market environments.

General Motors is the biggest automobile maker in the USA which is located in Detroit, Michigan. General Motors was called “Big three” with Ford motors and Chrysler in automotive industry. Moreover, it was also the company which symbolizes U.S capitalism. However it went bankrupt because of automobile recession in 2008.

In 2008, U.S economy has stalled due to financial crisis that occurred because of the subprime loan problem and Lehman Brothers. So G.M’s financial health has been tense. The financial results for the year ended December 31, 2008; it reported a net loss of 30.8 billion and 60 million dollars (U.S). G.M received emergency loans of $ 13.4 billion from the U.S. government in the end of 2008. However the funding did not turn around and received additional support many times. In 2009, Saab, Swedish Car Company which was affiliated by G.M also went bankrupt. Debt reduction negotiations with creditors were not settled until the due date May 2009. In June 1, G.M applied article 11 of federal bankruptcy law and went bankrupt. Total debt was $ 172.8 billion and asset size was $ 82.2 billion.

However, November 18, 2010, G.M was re-listed on the New York Stock Exchange. G.M has returned to the stock market after about a year and a half from bankruptcy. Collapse of GM’s scale was the largest ever in the manufacturing sector. U.S. and Canada both governments have carried out additional support a total of $ 39.6 billion. U.S government acquired the shares of 60%, government of Canada acquired the shares of 12%.And G.M was nationalized by U.S government. In 2013, December 9, the U.S government sold all shares acquired as collateral for government funding in order to bail out G.M, because the reconstruction was on track. Loss of about $ 10.5 billion was generated by selling of stock the U.S. government bought to help G.M.

From this example, we can see the intervention which U.S government made was effective and improved failed market. If U.S government did not intervene to automotive industry and let G.M bankrupted, all the small business which is related with G.M should bankrupted together with G.M and 2.63 million people lost their jobs. Even though we cannot get the final result of U.S government’s intervention to G.M yet, we can think it was proper intervention currently because we can imagine the situation G.M and Lehman Brothers together.

However, the government intervention has not only good effects but also negative effects against a market. We can use Japanese government intervention as an example. After World war â…¡, all Japanese people worked very hard, and Japan achieved a rapid economic growth. However, after the economic growth called “Japanese miracle,” Japanese economic fell into a great depression called “Lost decade” during 1991-2001. Usually, “Lost decade” represents the period in which Japan’s consumption, employment rate and the rate of economic growth were very low. The Japanese government influenced much to the great depression for following reasons. The first reason is a lot of bad loan owed by banks. According to Yukio Nakazawa, the Japanese government used to use regulated interest rate for determining the interest rate in bank. However, the Japanese government conducted financial deregulation due to a growth of information technology and deregulation of international flow of capital. As a result, many Japanese banks faced severe competitions and started to treat high risked real-estate lending to make profits. Fortunately, the prices of land were increased year by year and it would be a bubble situation. In addition, many Japanese people bought many lands to make profits using incredible rise of lands’ price and it accelerated bubble economy, but the bubble economy collapsed suddenly. In 1989, Nikkei Stock Average reached peak and dropped rapidly. Similarly, the price of land fell terribly and loan on real estate became insolvent; therefore, many Japanese banks had the non-profit loans problems and got a bad financial condition. What is worse, some banks became bankrupt and a rate of unemployment was increased. According to a department of economic in Kansai Gakuin University, the rate of unemployment reached high point 5.9% after collapsing bubble economy. From the evidence, it is apparent that failure of government’s intervention affected Japan’s economy seriously. The second reason is zero-interest-rate policy. The Japanese government adopted zero-interest-rate policy to enhance capital investment and reduce companies going bankrupt. Actually, Japanese companies invested much money to build plants. On the other hand, they could not make profits even though they invested much money. Consequently, they could not pay loan back to the banks, and worker hired with enhancing their capital became an excessive. Those factors caused a negative spiral. Moreover, as John Maynard Keynes stated that when zero- interest policy is adopted, the effects will be meaningless because of “Liquidity trap” that is a situation in which the rate of interest is so low that no one wants to hold interest-bearing assets and people only want to hold cash( Dictionary of Economics). As a result, zero-interest-rate policy did not work properly and Japanese economy would be a worse situation. The third reason is increase of consumption tax. In 1997, Ryutaro Hashimoto, Japan’s former prime minister, increased consumption tax from 3% to 5% to reduce government spending. However, it made Japanese people use less money and it worsened the depression. From the rate of 1995, Japan’s economy became to recover gradually because financial policy and disposal of bad loans were successfully committed, and Japan’s economic growth rate exceeded 3%. However, the Japanese government increased consumption on the occasion of recovery, and it discouraged the recovery of Japan’s economy and made the depression continued longer.  

In conclusion, government intervention can improves the operation of market but it is not always applicable. To prove this opinion, we investigated about positive and negative examples. From the case of student loan policy in U.S and Medical insurance system in Korea, we investigated about the reason why government intervenes for equitable distribution of wealth and how the both government use the policy for the people. We also looked into G.M in U.S as an example and we figure out how government intervenes to the market when the market fails and the positive effects from the government intervention. We also focus on the Japanese “lost decade” as a failed government intervention and the result of wrong interest rate policy. Base on the examples that we used, we can see that government intervention can improve the operation of market but it is not always applicable. Some policies can improve the market and give lots of benefits to people, but the other policies can aggravate the operation of market and make people unfortunately. So it depends on the kind of policy that government intervenes and how to control it. In addition, it is one of the most important reasons why people learn the economics and theories.


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