Why doed a free market economy need some gvernment intervention?

[Taylor]

[Daa-yum]

The short answer is: to correct market failures.

Because free markets are not perfect. There are so called market failures, this is when markets fail to allocate scarce resources in a way that benefits social welfare.

I can think of at least two different reasons why governments intervene:

1. To ensure competition: in a free market economy, a successful firm may start buying up other not so successful firms and may eventually even create a monopoly. In this situation it can control the market as it wants. This is not a desirable situation. So governments should prevent this from happening.

Sometimes companies secretly agree that they're gonna fix prices at a certain level to make more profits, this is called a cartel. Governments can intervene to stop this. This is also harmful to competition and will lead to higher prices.

2. To regulate businesses: to make sure that businesses do not take advantage of customers. The government has to accept and enforce laws that protect consumers (for instance about refunds).

In some situations governments like to promote an idea, because they believe it's important for the future, but the markets won't promote it, because it is inefficient. For instance, non-renewable energy is cheaper at the moment, but if a government believes that we have a serious problem and we should turn towards renewable energy sources, then they can intervene by taxing non-renewable sources more extensively or subsidizing renewable sources.

For a more detailed, academical explanation, check this article: http://en.wikipedia.org/wiki/Market_failure

[simplicitus]

You've got it backwards. Free market economies just can't exist. The closest you can come is a mixed economy with a large market component.

"Free markets" do a good job of producing private goods for personal consumption, but are terrible at producing public goods.
http://en.wikipedia.org/wiki/Public_good
That means no government, no military, no legal system, no network of roads, no GPS, etc. for a pure free market economy
http://rodrik.typepad.com/dani_rodriks_w...ick-3.html

Free markets are also terrible at producing private goods with high positive externalities. That means that very few get any sort of education in a free market economy. And, especially these days, you can't have a viable economy without essentially everyone having a minimum level of education and many having advanced education.

Free markets produce very high levels of income inequality
http://worthwhile.typepad.com/worthwhile.../gini.html
and that is bad for the economy:
http://www.greenchange.org/article.php?id=5975
http://www.youtube.com/watch?v=qOP2V_np2c0
so you need some agency to redress the inequality with transfer payments, progressive tax structures, etc.

Then you come to the area of "market failures" that everyone mentions. But of course, the implication is that when it is not failing, the market is doing a good job. Well, the problem with that is that the market is _always_ failing.
http://delong.typepad.com/sdj/2010/12/wh...ourse.html
and it has been proven that it will almost always fail:
http://www.princeton.edu/~dixitak/home/S..._Dixit.pdf
even if people were "rational".
http://economistsview.typepad.com/econom...ative.html
But since they are not, the situation is even worse:
http://www.newyorker.com/talk/comment/20...lk_cassidy

And that's just the economic issues associated with a free market economy. Economies in isolation are meaningless; they have to be part of a society. If the structure of an economy is such as to destroy the society, then it doesn't matter how efficient or productive the economy is - it just won't survive for very long.

[RVNW]

The only legitimate role for the government in a free market is protecting the rights of people form force and fraud (ie: no stealing or fraudulent ponzi schemes, or coercing competitors into leaving markets).
Also, market failures are a myth and many supposed failures could probably be traced to some for of government intervention in the past (the federal reserve counts).