Reasons for Government’s Intervention in Private Business

Reasons for Government’s Intervention in Private Business

The brutal consequences of free trade economy around the world compelled the Government, social thinkers and economists to stress for some sort of state intervention. There are many justifiable reasons for this need. They are as follows:

Reasons for Government's Intervention in Private Business
Reasons for Government’s Intervention in Private Business

1. Provision of Non-market Products and Indivisible Services

Certain products and services are necessary for the very existence of the society. They include nation’s defense and related services, price protection, flood control, protection of public monuments, buildings etc. These services are called non-excludable public services or goods. The market mechanism cannot and shall not provide such services. Hence, they  cannot be left to the market mechanism.

Some of the services or activities can be carried on by voluntary agencies and service organizations like Red Cross etc. But it is difficult to promote and administer such organizations. Again the difficulties involved in collecting the fees from the beneficiaries are not also very easy. Only a competent Government can organize such activities and provide finance to carry on them.

2. Provision of Basic Infrastructure

The provision of basic infrastructure like power, communication, port facilities, banking and other institutional facilities is sin qua non for the growth of the national economy. It involves a huge capital outlay.

At the same time, the return is very poor when compared to the capital investment involved in them. Moreover, it is not also advisable to leave them in the hands of private individuals or market participants to bear the burden. Moreover, they may also exploit the society if they have a free hand in them.

In such a situation, the Government and its organisations alone should be called upon to finance such activities particularly in underdeveloped countries and even in the developing economies.

3. Improvement in Market Functioning

Perfect market in its original sense, does not exist anywhere in the world. Even developed economies are no exception to this. The Government cannot correct the imperfections in the market absolutely. However, as pointed out by Gerald Sirkin, these imperfections are capable of at least partial correction by the Government action. He further declared that the state might help to correct some of the imbalances in the market mechanism in the following ways.

1. Provision of Correct Information

Market system will work better only when the individual participants i.e. consumers, resource owners and entrepreneurs have perfect and correct information on various aspects. They need information regarding the quality and prices of raw materials, end products, factor costs, labour exchanges and so on.

In developed markets, more market information is available without the help of the Government. Various private service organizations are furnishing such information by directly conducting market surveys etc. But in a less developed market, the Government alone can provide such information and the private agencies are not competent enough to collect and disseminate data regarding market trends etc.

Even in case of developed markets, the private information services are not available to small consumers, unorganized labour and the small investors. (However, now-a-days the need for state’s help is not felt much in all the countries and in all the markets).

2. Promotion of Competition

Competition, in its real sense has never existed in all free market economies. The past history shows that how business people and industrialists avoided Competition and exploited the society by using certain devices like mergers and amalgamations, syndicates, pools and cartels.

The leading business magnets built up their own empire and practiced all undesirable trade practices. Hence there is a need for state intervention to protect the interests of the society and to promote real competition.

The Government in this regard can help in many ways. In particular it can

  1. Control the size of private enterprises i.e. monopoly houses.
  2. Regulate and prohibit monopolistic, restrictive and unfair trade practices.
  3. Prevent mergers and amalgamation of competing units.

In extreme cases, it can even open domestic market to foreign competition, streamline its own licensing etc.

3. Allocation of Resources among Better alternative Uses

The investors will prefer to invest their surplus only in profitable avenues. On the other hand, they will hesitate or even avoid investment in areas, which are socially desirable but less profitable. Such a situation will really restrict the movement of resources among alternatives uses, which is undesirable from the competition point of view. Only state intervention can remedy this.

The Government may, through rewards and incentives encourage movement of productive resources among alternatives uses. Examples of this type are provision of subsidies to industrial units started in backward areas, tax holiday benefits, special incentives to certain type of industries etc. It can also enact suitable legislation to curb monopolistic and restrictive trade practices, control capital issues etc.

4. Provision of Institutional Support

Government can provide cheap credit facilities to certain sectors and stimulate their growth. Examples of such sectors are small business and agriculture. These sectors provide employment opportunities to millions of people but the private credit agencies are not extending a helping hand to this sector.

In a free market economy, small businessmen, village artisans, agriculturists etc. shall find their very existence in trouble.

5. Standardization of Business Practices

Standardized commercial practices are necessary to bring stability in commercial inter change. Customs, trade usage etc. are of course, there. But they are only voluntary. It is now recognized all over the world (including U.S.A.) that the Government is the only competent agency to set standard business practices.

The Government through legislation associated with competent administrative machinery can check most of the unethical and unfair trade practices.

6. Stabilization of Aggregate Demand

One of the most important functions of the Government is to provide a sound monetary system, which is necessary for conducting business transactions. The rules and regulations relating to the money system constitute the official monetary policy. Whether the amount of money in circulation is to be increased or decreased also depends on the Government policy. Hence the Government through its appropriate monetary and fiscal policies can facilitate smooth functioning of the market at the full employment level.

4. Correction of Inherent Defects in the Market Mechanism

Free market in its literal sense does not exist anywhere in the world. The market mechanism has certain inherent defects, which cannot be corrected without the intervention of the state. Situations, which call for state intervention, include the following.

1. Ignorance of the Consumer

In a free market it is presumed that the individual consumer knows his interest and is aware of the economic alternatives. In other words, the individual consumer would gain the greatest material satisfaction with the least cost.

But in reality the situation is not so. The individual consumers are not aware of the happenings in the market scene. Moreover, the cost of acquiring knowledge of the market is also abnormally high and the poor consumer cannot afford to bear such cost. Even the information available is not also perfect in many respects.

In such a situation, the state has a natural duty to come to his risk and combat his ignorance. Otherwise, the individual consumer cannot form any rational judgment after analyzing the realities of the situation.

2. Natural Monopolies

The exponents i.e. advocates of economic freedom did not anticipated the evils of the factory system, the development of giant corporations etc. The advantages of large-scale production associated with a favorable market condition, enabled many businessmen to engross the entire market for a commodity.

With a view to avoid true competition the businessman employed the devices of combinations like mergers and amalgamation, pools and cartels etc., and exploited the society to the maximum possible. The situation was too worse when the product has an inelastic demand. The only remedy to solve the situation is the Governmental regulation through legislation.

3. Absence of Relevant Information

Many environmental forces and the changing conditions in the modern business world, made it imperative for every business firm to have a well managed information system. The need for market information at present is stronger than at any time in the past. The present day market is more complex and in the absence of well-arranged information system business risks cannot be reduced and suitable decisions cannot be taken immediately.

But in the actual practices relevant information is not available even if the businessmen are prepared to bear the cost of obtaining it. The Government is in a better position to collect the relevant information and supply them to the manufacturers.

4. Allocation of Resources in Times of Emergencies

In times of emergency, certain sectors of the economy require additional resources urgently. Price mechanism brings about the requisite reallocation of resources in those times quickly and promptly. Hence, the Government has no other alternative other than to intervene directly into the market and exercise control over it.

Certain controls such as price freezing, allocation or rationing of consumer goods, industrial raw materials, restrictions on foreign exchanges etc: are normally considered as temporary measures to meet the economic problems arising in times of war or during other external emergencies.

5. Speculation

Speculation is by and large a useful economic activity in as much as it increases the volume of transactions in the markets. It also has a stabilizing effect on the prices because speculators buy when prices are low and sell when prices are high.

In spite of this marked advantage, speculation should not be allowed to grow beyond a certain limit. Excess speculation shall distort the market mechanism. Moreover, mistaken forecasts by speculators shall also have a destabilizing effect.

In such situations, the Government intervention shall become necessary-

  1. To provide correct information to the market participants, and
  2. To regulate and control the speculative transactions by providing necessary rules and procedures.

In our country, the Government exercises tight control over the securities market through legislative action.

6. Inequalities in the Distribution of Income and Wealth

In a market economy, income and wealth of individuals depend on the number of productive units, which they own. The number of units of productive services, which they own, depends on inheritance, effort and luck. As stated by Prof. Thomson,

the benefits of inheritance, effort and luck are not equally distributed in the existing social order and are not likely to be so distributed in any conceivable scheme of social organization.

So ineffective market system is incapable in bringing about equality in the distribution of income and wealth. Undue variations in income and wealth cannot be tolerated in any decent society. Some sort of Government intervention is, thus, necessary to combat (fight) inequalities in income and wealth distribution.

7. Restrictions on Imports

In a free market economy, goods are allowed to move freely and hence home industry has to face stiff competition from foreign manufacturers. Hence restrictions on imports have become necessary to protect at least a few select home industries.

In some cases, there may exist a justification for protection but there is ample scope for abuse of the same. To deal with such a problem, it is proper for the Government to formulate suitable import policy.

5. Optimization of the Rate of Savings

Any country, in which capital formation is very low, the rate of development shall also be low. It is more so in developing countries. Mobilization of savings to its optimum level is impossible without Governments support. By forcing and encouraging individuals to maximize the rate of savings, Government can make available the requisite capital for the establishment and the growth of industries and other sectors of an economy.

In India, both voluntary and compulsory savings schemes are formulated to mobilize savings to its optimum level. In spite of the sustained efforts taken by the Indian Government and other public financial institutions the rate of capital formation is still low. Now the public enterprises are also allowed to go to the capital market and they are issuing bonds and debentures.

6. Provision of Humanitarian Services

The Government of every industrial society has found it necessary to pass legislation regulating matters such as minimum wages, maximum working hours, the prohibition or regulating of women or child labour, and the establishments of minimum health and safety standards in factories, work shops and establishments. As the industrial societies mature, this type of legislation is frequently extended to include old age and retirement pensions and health, accident and unemployment insurance.

The market is an impersonal agency. It takes into account or recognizes only those virtues or values, which are marketable. It never cares for humanitarian considerations and non-economic reasons. Hence Government intervention through legislation has become inevitable in all economies.

Thus, free market economy has become an outdated concept and has no relevance today. Even in the so-called capitalist economies, Government intervention has become frequent.

A.Mussulman and John H.Jackson, well-known professors of the American Universities, enlist the reasons for Government control in a summarized form. The reasons given by them are:

1. To protect the welfare of the individuals and to promote higher standards of public health, safety, morals and general well-being.

2. To maintain equality of opportunity for all persons regardless of their sex, national origin or religion.

3. To restrain business from engaging in practices that would be harmful to the public.

4. To protect small firms from unfair competitive abuses by the big firms.

5. To prevent unfair practices resulting from mergers or other forms of combinations such as price fixing.

6. To conserve our national resources-notably forests, fuels and water and to prevent dangerous pollution of the atmosphere.


To conclude it may be remarked that private sector is very weak, short sighted, too tradition bound, cautious and therefore incapable of taking of bigger tasks for economic development. The market mechanism, on which it depends, has no element of public interest in it. The market mechanism, itself has many defects, which cannot be corrected without state intervention. Therefore, the state should take the initiative and intervene wherever necessary.

At the same time it should not be misconstrued that private business has no role to play in the national economy. Excepting a very few countries where socialistic economic system is prevalent, other countries in fact follow only mixed economic system.

Even in socialist economies like U.S.S.R. the importance of private business in the economic development is now recognized. Thus, it may be remarked that market (private business) and Government are the key institutions in a society. Failure of either of them to live up to the expectations shall give rise to certain problems.

Moreover, market mechanism shall be made meaningful and eradication of all its evils is possible only when the Government intervenes wherever and whenever necessary.