The  case for government intervention arises from market failure. Market failure occurs for three reasons:

1. Markets may be slow to react to disequilibrium in the market. For example, a worker who is made redundant due to a contraction of the UK steel industry may need government support during a period of retraining because of a skills mismatch. He may also need help in finding work and financial support during the period of unemployment.
2. Markets which are not perfectly competitive may give rise to resource misallocation. Monopolists for example may try to dominate markets and exploit consumers.
3. Market externalities may arise. As economic growth occurs production and consumption of goods and services will
   increase. Production and consumption of goods and services both create costs and benefits. The costs and benefits arising from production and consumption may be private or social. Market failure may arise where the externalities associated with production or consumption are high.

Market failure results in a loss of economic efficiency. Economic efficiency occurs “when the cost of producing a given output is as low as possible all else being equal“. Cutting the cost of a good by reducing the cost of materials does not result in an increase in economic efficiency it is achieved by reducing quality.

Governments intervene into markets in order to provide certain goods that would otherwise not be provided.. Most goods are described as private goods. If a private good is consumed by one person it cannot be consumed by another. If you buy a car and drive it around no-one else can use that car unless you agree to let them. The car is yours exclusively. The same principle applies to a whole range of goods and services. However not all goods are private goods. In some instances one person can enjoy the benefits of consuming a good without preventing someone else also consuming the same good. In certain instances, if you provide a good to be consumed by one person then it may be consumed by everyone. These goods are referred to as public goods. Examples of public goods include defence, streetlighting and lighthouses, the prison service and the judiciary. The problem with public goods is that a free market would not wish to supply them. If a profit making firm was to provide streetlighting for example, it would not be able to charge individuals for using its service, givng rise to what is known as the free-rider problem.