Examples of Market Failure and Government Intervention

Role of government in correcting market failure, includes ways the government applies to correct problems of market failure in an economy associated with the purchase of public goods, external costs and benefits, and imperfect competition. Previous article addresses Government intervention methods used to correct market failure in today’s society and always ensures they provide a potential market strategy for efficient solutions.

Role of government in correcting market failure

Public goods

These are goods that can ultimately be used by a huge number of people at the same time with the consumption of one not necessarily rendering an opportunity cost on the other, this is known as non-rival consumption. Role of government in correcting market failure, includes the monitoring of Non-rival consumption entails that public goods are adequately spread across if they are being made available at a zero price which is something markets are reluctant to do. Further, the failure to sideline non-payers for consumption creates what is known as a free-rider problem which further prevents volunteer exchange

When markets attempt the voluntary exchange of public goods, resulting in a non-zero market price, efficiency is not achieved. A non-zero market price means that there is no equality between the value of the goods produced and the value or opportunity cost of the goods not produced, which is zero due to non-competing consumption.

Common examples of public goods are national defense, public health, and environmental quality. In any case, consumption by one does not create an opportunity cost for others, and non-payers cannot be excluded from consumption. And in any case, markets fail to efficiently allocate production, consumption, or supply, has everything to do with role of government in correcting market failure.

In close proximity to the public goods are near-public goods and common-property goods. These share only the two key elements of non-rival consumption or the inability to cut out non-payers. Near-public goods, like public goods, are not competitive in consumption, but non-payers can be excluded.

Unrivaled consumption means that efficiency is achieved by providing near-zero public goods, which markets do not. Like public goods, common-property goods are characterized by the fact that they cannot exclude non-payers, but they compete in consumption, that’s another role of government in correcting market failure.

Market control

Market control occurs when buyers or sellers can influence the price of goods and/or transactions. The ability to control the market, especially the market price, does not allow the market to correct its demand and supply prices.

Supply-side market control allows sellers to determine the demand price for the cost of non-produced goods and the cost of goods produced. An example of supply-side market control is a monopoly market with a single seller. A less extreme but more common example is an oligopoly, a market with a small number of large sellers.

Demand-side market control allows buyers to set their supply price, that is, the cost of non-produced goods, below the cost of goods produced. An extreme example of demand-driven market management is monopolies, i.e., single-customer markets. A less extreme but more common example is oligopsony, a market with few large buyers.

Common examples of markets controlled by supply or demand include the distribution of power between cities (monopoly), automobile manufacturing (oligopoly), employment in municipalities (monopsony), and employment in professional sports (oligopsony).

Externalities

Externalities occur when the bid price does not include the benefits or the costs do not include the bid price. This means that the quotation does not reflect the full value of the product produced, or that the quotation does not reflect the full value of the non-produced product. Therefore, the market equilibrium does not provide efficient distribution.

Pollution is a typical example of externalities. Residual emissions from the production or consumption of goods create an opportunity cost for others. In this case, the bid that wins the market does not include all of the opportunity costs of production. Missing costs are those that are passed on to others affected by the pollution.

In terms of benefits, education is an example of an externality. The benefits of education go beyond the educated person and beyond the market exchange. In this case, role of government in correcting market failure includes the market demand price does not include the full cost of the product, and the lost value is what others gain from education.

Imperfect information

Lack of information from the buyer or seller often means that the bid does not capture all the benefits of the product or that the bid does not capture all the opportunity costs of production. In other words, buyers may be willing to pay more or less for a product because they don’t know the true benefit of the product. Alternatively, the seller is willing to accept an amount that is more or less than the actual cost of replacing the production of the good.

In many cases, the seller has more complete information about the product than the buyer. The seller owns and controls the goods and is directly related to the goods. Most likely, they will find out if there is a shortage or problem with the product. On the other hand, the buyer is not familiar with the product. He only knows the information provided by the seller. In this case, the buyer typically has a different search price than the value of the product created, and this value is based on more complete information.

Having discussed the examples of market failure, is there a way market failure can be tackled? To answer the question, this article will look at government intervention that can be used to fix the market failure. When markets fail for one or more of these reasons, governments often have to act.

The existence of government is mainly due to the failure of the market for public goods. Modern governments have evolved over the years to deal with other market failures. Governments have three main tools to prevent market failures in public goods: market control, externalities, and incomplete information.

Direct Provision

A common method used by governments to fix market failures in public goods is direct provision. In other words, the government oversees the production and/or distribution of public goods among the population. This alternative is most obvious in the field of defense. National governments recruit soldiers, purchase arms and equipment, maintain military bases, and generally oversee military operations. Governments also tend to provide products that are not subject to market control, called utilities. These include water supply, power generation, and waste collection.

Regulation

The second method mentioned is the regulation of production, consumption and trade decisions by the private sector, both businesses and consumers. In other words, governments set the rules of the game, which is what they usually do for the people, but in this case, they are specifically aimed at correcting market failures.

Government regulations are often used to eliminate market surveillance, external factors, and market failures due to incomplete information. For example, a company with significant market control may regulate prices by the government. Alternatively, governments can limit the number of pollutants emitted from certain industrial activities. Rules requiring sellers to provide information to buyers are a means of combating market failures due to incomplete information.

Taxes

The third option is to use mandatory state taxes. In other words, the government directs the creation of barriers to prevent unwanted activities. Taxes are suitable for controlling external factors or facilitating the provision of information. For example, if the government imposes a tax equal to the external cost, the efficiency of the industry producing pollution externalities can be stimulated. Alternatively, government subsidies can be used to encourage activities with negative efficient taxes and to eliminate inefficient market externalities.

In conclusion, Role of government in correcting market failure and dealing with market failure is inevitable especially in developing countries due to scarce available resources. However, when market failure happens, a government can always intervene and fix the failure.

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