Government Intervention

Introduction

The state should intervene in the economy to allocate resources efficiently, whether in greater or lesser degree, depending on the philosophy and objectives of the current government.

State intervention in the economy, is very necessary, something that has been tested with the international financial crisis. It was mainly due to the poor state regulatory intervention in the financial sector.

Depending on the objectives of a government, the state must intervene in many ways, so the economy could achieve the purpose intended. The intervention can be from simple to complex control, or more direct intervention in the behavior of basic elements of the economy and consumption, supply or to the savings.

There are many tools that could be used for state intervention. Among the most common tools, we have taxes, subsidies, price controls and government spending. By applying one or more of these tools, one can directly influence the consumption capacity of people, business supply and productivity. It could also bring a significant change in saving and investment behavior of the economy (Fitzpatrick, Sanders & Worthen, pp. 23-33). For example, when the state is interested in promoting or revives a sector of the economy, it creates tax breaks for companies investing in this sector, hence; there are tax free zones, and tax exemptions for certain activities. Perhaps the most important and indispensable tool is the control to be exercised by state enterprises, especially those providing public services or high impact on society, such as the financial system.

Although some politicians and economist proclaim the absolute freedom of the economy, it requires a control and state intervention to prevent some economic actors commit harm to the society, as there is no control over speculation. The state must necessarily create a framework that ensures an acceptable environment for all economic actors; otherwise, it will create conflicts that can ruin the entire economy.

Government Intervention in Energy Sector

In modern societies, power has become a vital asset. That is why governments pay exceptional attention to all matters relating to energy supply. The purpose of government should be to maximize the energy sector's contribution to what is called "social welfare". The welfare level is determined by everything that contributes to the happiness of the people, but when developing economies are regulated, than it mainly depends on two variables: a) level of wealth available in society, and b) the distribution of that wealth.

The fundamental question that arises in the regulation of the energy sectors is: how can the government regulate energy sector to maximize social welfare? Or, put it another way, what principles should guide the conduct of energy regulators that such action is consistent with maximization of social welfare?

In this case, it is important to follow the below mentioned principles:

1.Minimize the impact of market failures that may affect the efficiency with which activities are carried out,

2.Ensure that companies have incentives to achieve efficiency

3.Avoidance of redistributive policies

Minimize the Impact of Market Failure

If markets are working properly, the price signals received by producers and consumers correspond to the marginal costs of supply or ...