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In a free market economic system, scarce resources are allocated through the price mechanismwhere the preferences and spending decisions of consumers and the supply decisions of businesses come together to determine equilibrium prices. The free market works through price signals. When demand is high, the potential profit from supplying to a market rises, leading to an expansion in supply (output) to meet rising demand from consumers. Day to day, the free market mechanism remains a tremendously powerful device for determining how resources are allocated among competing ends.Intervention in the marketThe government may choose to intervene in the price mechanism largely on the grounds of wanting to change the allocation of resources and achieve what they perceive to be an improvement in economic and social welfare. All governments of every political persuasion intervene in the economy to influence the allocation of scarce resources among competing usesWhat are the main reasons for government intervention?The main reasons for policy intervention are: * To correct for market failure * To achieve a more equitable distribution of income and wealth * To improve the performance of the economyOptions for government intervention in marketsThere are many ways in which intervention can take place – some examples are given belowGovernment Legislation and RegulationParliament can pass laws that for example prohibit the sale of cigar...

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