FINAL EXAM INDUSTRIAL ORGANIZATION

ESSAY

"The Important of Government Intervention Policies in Controlling

the Market, a study for Objectives to Stimulate the Industrial
Growth in the Village Areas"

Arranged by:

Hadiya Sani Ashilla

(2010513016)

Economics

Lecturer :

Prof.Dr Firwan Tan, SE., M.Ec., DEA. Ing

Industrial Organization
FACULTY OF ECONOMY AND BUSINESS

ANDALAS UNIVERSITY

2022/2023
 I. INTRODUCTION
Regional Government is the administration of government affairs by local governments and
regional people's representative councils according to the principle of autonomy and
auxiliary duties with the principle of the widest autonomy in the system and principles of the
Unitary State of the Republic of Indonesia as referred to in the 1945 Constitution of the
Republic of Indonesia. Local Government in Indonesia consists of Provincial Governments
and Regency/City Regional Governments consisting of regional heads and the Regional
People's Representative Council (DPRD) assisted by Regional Apparatus.

Government Intervention" between necessity and rejection in economics is the title of this
small paper. This phenomenon will become popular when entrepreneurs and industry
(generally the general public) need or face issues that concern and are related to the needs
of many people. One party wants the government not to intervene in managing or managing
an economy, just the private sector or entrepreneurs. On the other hand, the community or
entrepreneurs themselves (industry circles maybe) do not want the government to be
hands-off in dealing with an economic problem, perhaps for fear of bearing too great a risk
or even not being trusted by the private sector by the community.

II. DISCUSSION AND REGULATION

The role of government intervention has become a common phenomenon in economic
development especially in developing countries. Interventions that exceed capacity have
apparently encouraged economic distortions. Because this tendency is followed by the weak
morality of economic actors who have turned into greedy and inefficient economic regimes.
Therefore, the new paradigm should position government intervention as a driving factor for
economic efficiency when the process of allocating resources is, in some ways, impossible to
leave to market mechanisms.

The role of the government in economic development is the key to a more prosperous
society, it is even hoped that Indonesia can become a developed country and an industrial
country. Underdeveloped countries or developing countries are so great and economic
problems cannot simply be left to the free mechanisms of economic forces. For this reason,
in an effort to balance the growth of various sectors of the economy until supply must be in
accordance with demand. This requires supervision and regulation by the State or
government in an effort to achieve balanced growth. Balance requires an oversight of the
production, distribution and consumption of commodities. The government should make a
physical surveillance plan as well as fiscal and monetary measures that need to be taken.
Such measures are inevitable in an effort to mitigate the economic and social imbalances
that threaten developing countries. Overcoming social differences and creating
psychological, ideological, social, and political benefits for economic development became
an important task of the government.
III. METHODOLOGY APPROACH
According to the classics, what is important for the Government is not to work on activities
that have been done by individuals, whether they are good or bad, but the Government
should do activities that are not/have not been done by the private sector either individually
or together. According to Adam Smith, the Government has 3 functions, namely:
1. The function of the government to maintain homeland security and defense. So that
citizens can carry out business activities calmly and comfortably
2. The function of the government to administer the judiciary. So that every citizen has the
same rights and obligations
3. The function of the government to provide goods that are not provided. So that citizens
get conveniences in carrying out business activities.

The ideal role of government, as referred to above, has long been outlined in the classical
economy, as well as imperatip the constitution has regulated it. Therefore, a crucial problem
that must be addressed is the firmer commitment of economic actors to this. Low
commitment has a linear tendency with moral wisdom to direct the behavior of economic
actors, especially at the microeconomic level. Given the root cause of the chaos, it becomes
more relatable if the improvement of economic performance stems from the
implementation of the economic learning process, especially in the faculty of economics,
moral content must be the most important part of the learning process. The study of
economics has so far been more towards technical problems, as part of pragmatic and short-
term nuanced demands, it turns out that it only creates human beings who are skilled, but
weak in social responsibility, and instead weaken the existence of economics in overcoming
problems that occur in society.

In an effort to improve economic life, individuals, and members of society do not only
depend on the role of the market through the private sector. The role of government and
market mechanisms (interaction of market demand and supply) is complementary (not
substitution) with other economic actors. The government as one of the economic actors
(government households), has an important function in the economy, namely functioning as
stabilization, allocation, and distribution. The explanation is as follows:
1. Stabilization Function, namely the function of the government in creating economic,
socio-political, legal, defense, and security stability.
2. Allocation function, namely the function of the government as a provider of public goods
and services such as the construction of highways, school buildings, the provision of lighting
facilities, and telephones.
3. Distribution Function, namely the function of the government in equalizing or distributing
people's income.

The need for the role and function of government in the economy is as follows:
1. Economic development in many countries generally occurs due to government
intervention either directly or indirectly. Government intervention is needed in the economy
to reduce market failures such as monopolistic price rigidity and negative impacts of private
business activities such as environmental pollution.
2. Market mechanisms cannot function without the existence of government-made rules.
This rule provides the basis for the application of the rules of the game, including the
provision of sanctions for economic actors who violate them. The role of the government
becomes more important because market mechanisms alone cannot solve all economic
problems. To ensure economic efficiency, equity and stability, the role and function of the
government is absolutely necessary in the economy as the controller of market mechanisms.
3. Market failure is a term to refer to market failure in achieving optimum allocation or
division of resources. This can especially happen if the market is dominated by monopoly
suppliers of production or consumption and a product results in side effects (externalities),
such as the destruction of the environmental ecosystem.

As already mentioned earlier, the state or government has an important function in

economic life, especially with regard to the provision of goods and services. These goods and
services are indispensable to the community and are referred to as public needs. Public
needs include two kinds of goods, namely public goods and services and private goods and
services. The explanation is as follows:
1. Public goods and services are goods and services whose use can be enjoyed together.
Examples of public goods and services are roads, health facilities, education, transportation,
drinking water, and lighting. With consideration of business scale and efficiency, the state
carries out economic activities directly so that people can be faster and cheaper in utilizing
these goods and services.
2. Private goods and services shall mean goods and services produced and whose use can be
separated from use by others. Example: the purchase of clothing will cause the right of
ownership and use of the goods to transfer to the person who bought them. This item is
generally pursued by each person himself.

In addition, the important role of the government both directly and indirectly in economic
life is to avoid the emergence of externalities, especially side impacts on the natural and
social environment. In general, the market sector (private sector) is unable to overcome the
impact of adverse externalities such as environmental pollution arising from competition
between economic institutions. For example, a textile factory that is in a market of perfect
competition. By sound industry standards, the plant is supposed to build a sewage facility.
However, they threw it away. If the government does not take decisive action, by forcing the
plant to build a factory waste disposal facility, more and more residents will feel
disadvantaged by the waste or pollution caused by activities in the plant. In addition to
giving warnings to this, the government also imposes a pollution tax to fund other losses.

GOVERNMENT INTERVENTION
In essence, the government participates in economic activities in order to overcome market
failures so that there are no externalities that harm many parties. The form of the role of the
government is to intervene either directly or indirectly. Below is the explanation:
1. Government Intervention in the Economy To overcome market failures such as price
rigidity, monopolies, and adverse externalities, the role of government is indispensable in a
country's economy. This role can be performed in the form of interventions in a formal or
indirect manner. The following is direct and indirect government intervention in market
 pricing to protect consumers or producers through floor price policies and ceiling price
policies.

A. Direct Government Intervention

1) Floor price
→ The minimum pricing or base price carried out by the government is aimed at protecting
producers, especially for basic agricultural products. For example, the price of dry grain
against the market price is too low. This is done so that there are no middlemen (people /
parties who buy at low prices and resell at high prices) who buy the product beyond the
price set by the government. If at that price no one buys, the government will buy it through
BULOG (Logistics Business Entity) then distributed to the market. However, such pricing
mechanisms often encourage the emergence of gela market practices, that is, markets
whose price formation is beyond the minimum price.
2) Ceiling Price
The government's maximum pricing or Highest Retail Price (HET) aims to protect consumers.
The HET policy is carried out by the government if the market price is considered too high
beyond the limits of people's purchasing power (consumers). Sellers are not allowed to set
prices above that maximum price. Examples of maximum pricing in Indonesia include the
price of pharmaceutical drugs, fuel prices, and transportation or transportation tariffs such
as city bus tickets, train fares and taxi fares per kilometer. As with minimum pricing,
maximum pricing also encourages the occurrence of a black market.

B. Indirect Government Intervention

1) Tax Determination
The tax determination policy is carried out by the government by imposing different taxes
on various commodities. For example, to protect domestic producers, the government can
increase high tax rates on imported goods. This causes consumers to buy domestic products
that are relatively cheaper.
2) Providing Subsidies
The government can intervene or intervene in the formation of market prices, namely
through the provision of subsidies. Subsidies are usually given by the government to
companies producing basic necessities. Subsidies are also given to newly developing
companies to reduce production costs in order to be able to compete with imported
products. This policy is taken by the government in an effort to control prices to protect
producers and consumers as well as to suppress the rate of inflation.

IV. CONCLUSION
Economic problems do not only include micro-problems such as price rigidity, monopolies,
and externalities that require government intervention. Economic problems also occur in the
macroeconomic sphere which requires government policies. In developing countries, there
are generally three major problems of economic development. All three problems relate to
poverty, economic inequality, and rising unemployment. Indonesia's macroeconomic
problems in building the country are actually not only limited to that. Uncontrolled inflation,
dependence on imports and foreign debt are government problems in the macroeconomic
sphere.