Government intervention is any action carried out by the government or other public entity that affects the market economy with the direct objective of having an impact on the economy, beyond the mere regulation of contracts and provisions of public goods.

Government intervention advocates defending the use of different economic policies to compensate for the flaws in the economic system that lead to imbalances. This is based on the idea that the law of supply and demand is not enough to ensure a balance in the economy and government intervention must be used to ensure its proper functioning.

As in most markets in imperfect competition, and especially in monopolies, a company can exercise abusive power that results in a loss of well-being. In these cases, government intervention will be supported both by consumers seeking lower prices and by companies seeking to reach a market segment. Regulations such as pricing, taxes, or subsidies can be used to restore and maximize the initial inefficiency of natural monopolies.

However, the government has to be cautious in applying and setting these regulations as incorrect implementation can lead to a damaging market structure. To achieve an optimal level of regulation, governments should analyze and determine if natural monopolies can be maintained by setting a lower total cost. If this is the case, the government will have to ensure that the company does not earn excessive revenue and that prices are kept at fair levels. Otherwise, if the total costs of the industry decrease if new companies enter the market, the government should regulate their entry. Essentially, what governments should do is balance the conflict between profitability and industry efficiency.

The state intervenes in the economy, basically, because the market is not capable, by itself, of sustaining the optimal economic functioning, nor of solving the problems caused by the market itself.

- First, it provides a legal and social framework within which market participants buy and sell goods and services produced from the scarce resources of the economy.

- Second, the government struggles to maintain competition in the goods and services markets by trying to ensure that no seller dominates the market unequally.

- Third, the government may decide to play a role in the redistribution of income and wealth, either through the tax system (particularly through income or income taxes), or through different types of government grants and special interest group grants.

- The fourth function of the government, related to the market, is the reallocation of resources. According to economic theory, the lack of good resource allocation occurs when a market has certain externalities or indirect effects. That is, some of the benefits or costs associated with the production or consumption of a particular product accumulate with other different parts of the buyers or sellers of a product.

- The fifth main function of government in a market economy is the stabilization of the aggregate economy. The market economy is prone to the ups and downs of economic activity. Governments can employ fiscal and monetary policies to deal with unemployment and inflation problems, which generally occurs at different stages of the cycle.

State intervention can be:

- DIRECT intervention, that is, the State acts directly as an economic subject, with three fundamental forms: public companies, the possible nationalization of companies or activities, and planning; although this, in a market economy, tends to be, for all the above, indicative, not imperative, that is, that the different economic subjects are not obliged to comply with the indications of the Economic Plan. If not, we would be in an economic system of central planning.

- INDIRECT intervention or ECONOMIC POLICY, which is the most important form of intervention in the market economy. The State adopts measures from which it is expected to force a certain behavior of economic subjects, but without them being obliged to such behavior, only induced to do so. An example that we have already talked about: the devaluation of the currency. With it we saw that it was intended to increase exports, since these will be cheaper for foreign buyers: however, companies are not forced to sell more abroad; They can do it, they will have the conditions for it, but they are not obliged.