Government Role in Market Failure Jarrod Owens Saint Leo University Government Role in Market Failure The government has a key role to play in correcting market failures. A market is said to be working well when economic efficiency is being achieved. However, this is not often the case as markets sometimes fail to achieve economic efficiency that is characterized by market competitiveness, free flow of resources and availability of accurate information (Tewar, 2003). In other words, a market failure occurs whenever the resources are not efficiently allocated in a free market. This is usually detrimental since it impacts negatively on the citizens. As such, the government is expected to intervene by correctly the market failures. This paper …show more content…
However, the government has a responsibility to ensure that anomalies in the market are corrected properly and promptly for the benefit of the economy and citizens. As earlier stated, a market failure occurs where resources are not efficiently allocated. Market failures are caused by a number of factors. Firstly, market failure is caused by both negative and positive externalities (Salanié, 2000). Secondly, market failures are triggered by environmental concerns, such as global warming. Thirdly, lack of public goods, such as enough hospitals and schools is the other common cause of market failure. Additionally, market failures can result from underproduction of merit goods, overprovision of demerit goods, information asymmetry and abuse of monopoly power. The government has a responsibility to intervene in the case of market failure with the intervention measures being taken depend on the cause of the market …show more content…
In such a situation, the government has to correct the market failure by promoting the consumption of those goods (Salanié, 2000). For instance, where there could be under consumption in the education sector where people fail to attend schools because of the high cost of education, the government has a duty to intervene by subsidizing education. Subsidizing education ensures that the education becomes cheaper to the public including the poor, thereby enabling people to attend schools. The same applies to the transport in which the government can correct market failure caused by under consumption of public means of transport by subsidizing buses and trains. Abuse of monopoly power is regarded as one of the causes of market failures. Monopoly causes market failures because it allows companies to hike prices at free will at the expense of the consumer (Winston, 2007). To minimize the abuse of monopoly power, the government can intervene by blocking mergers. In this respect, the Competition Commission has to move with speed to block any merger from taking place in an
There is much controversy about what a ‘good’ monopoly is and what a ‘bad’ monopoly is. Monopolies can have a positive impact on the market. One example is the history of telecommunications. The American Telephone and Telegraph “consolidate(d) the industry by buying up all the small operators and creating a single network—a natural monopoly” (Taplin). It became easier and more convenient for consumers to communicate. This is an example of a ‘good’ monopoly. Louis Brandeis, counselor of President Woodrow Wilson, agreed. He said it makes sense for one or a few companies to own‘“natural” monopolies, like telephone, water and power companies and railroads” (Taplin). The keyword here: natural monopolies. Natural monopolies are different from most of the monopolies in the market place today. A natural monopoly “refers to the cost structure of a firm” (lpx-group). A monopoly is “associated with market power and market share in particular” (lpx-group). Natural monopolies make
This occurs when farmers continue to produce crops causing deflation in the money supply. The crops were selling for basically nothing because there was so much being produced. According to Laughlin, it is the farmers fault that they are suffering (Doc. E). If they would stop producing so much they would not be in this situation, yet they would still have the issue that they aren't making any money because they aren't producing crops, there is still a shortage of money. The farmers needed someone to help regulate the larger companies so that the smaller farmers would be able to produce their crops and make money off of
Market failure in a free market is defined as a condition where the allocation of goods is inefficiently done, resulting in an over allocation or under allocation of its resources. Market failures occur due to the presence of externalities.
The rise of the railroad industry in the mid 1800’s made for the grounds of a monopoly taking place. This fear of a railroad monopoly caused the first antitrust policy in 1890 to be enacted (“Government Regulation of Monopolies”). Putting in place this antitrust policy set off generations of debate about the government’s role with monopolies. Governments currently regulate and prevent monopolies and rightfully so but there is still an opposition to government intervention even in monopolies. In a free market society, which needs to be further defined, valid points are made on both sides of whether or not government should regulate monopolies. However, a stronger case is made to supporting the side of government regulation of monopolies in
“the exercise of that authority is curbed and shaped by the concern of government officials for its possible adverse effects of business, since adverse effects can cause unemployment and other consequences that government officials are unwilling to accept. In other areas of public policy, the authority of government is again curbed and shaped by concern for possible adverse effects of business” (Lindblom page 178).
...to short sightedness and greed. I believe, however, that these crashes can be avoided so long as the citizens do not let greed control them. My solution is to have an educated and informed population before allowing the consumers total control of the marketplace. While the CEOs profit of the hardships and shortsightedness of many, we, as a society, must take control. Only when the masses are able to make educated decisions can we ever have the possibility to prosper.
If financial markets are instable, it will lead to sharp contraction of economic activity. For example, in this most recent financial crisis, a deterioration in financial institutions’ balance sheets, along with asset price decline and interest rate hikes increased market uncertainty thus, worsening what is called ‘adverse selection and moral hazard’. This is a serious dilemma created before business transactions occur which information is misleading and promotes doing business with the ‘most undesirable’ clients by a financial institution. In turn, these ‘most undesirable’ clients later engage in undesirable behavior. All of this leads to a decline in economic activity, more adverse selection and moral hazards, a banking crisis and further declining in economic activity. Ultimately, the banking crisis came and unanticipated price level increases and even further declines in economic activity.
In regards to economic considerations, the presence or absence of market failure would be a critical issue to evaluating the need for privatization. If the situation exists in which the utilization of a free market economy will product too much or too little of the particular good or service, the privatization of this type of organization may prove to be detrimental to the mission of the organization and to the benefit of the community. If market failure is not an issue of consideration, privatization brings with it the concern of competition and how this will impact supply and demand. An artificial price ceiling or floor that had previously existed with the public institution will now be removed, allowing the market to have a natural equilibrium point that had not previously existed.
Competition is driving consolidation. The market power is then used to drive higher prices. This market-driven approach is counter-balanced with regulations and review by the Federal Trade Commission and Office of Inspector General to protect the public. This on-going back and forth will never be managed by law entirely as there is no way for enforcement agencies to stay ahead
.... Measures to avoid a situation of that nature must focus on the enactment of effective policy by both local and national governments to regulate their industries, and focus on having an adequate number of revenue-generating industries so as not to jeopardize public interests.
Before the public choice era, a traditional economist would approach the analysis of public policy through the concept of Pareto optimality (Lemieux 2004). Pareto optimality is defined as an efficient allocation of resources, where there is no way to reallocate resources to benefit some individual without harming another individual (Edgar Browning & Jacquelene Browning 1994). However, market failures can cause an inefficient allocation of resources. A few illustrations that generally lead to market failures include externalities and public goods. Governmental intervention through the development of public policy is commonly used to correct for such market failures. Over time, studies on public policy lead to a change in the way economists evaluated
...o make up the difference. This difference we have to make up is usually a higher tax. In raising the tax the price of the good goes up and when price goes up demand tends to go down. As the demand keeps falling and the price keeps rising the product usually ends up off the market and filing a chapter eleven. It typically does not go that far but this is an example of what could happen. A free market is a privilege to have and it is a shame people have to take advantage of it because they do not feel the need to work hard or to go out of their way to do something for someone else.
Generally speaking governments intervene in the market for two main reasons: "social efficiency and equity". [1] One does not expect to see a government intervene in the economy to favor a firm, or because the government would profit from such an intervention in the way a firm sees profit (except maybe voters positive perception of the intervention).
Market failure has become an increasingly important topic for students. In simple terms, market failure occurs when markets do not bring about economic efficiency. There is a clear economic case for government intervention in markets where some form of market failure is taking place. Government can justify this by saying that intervention is in the public interest.
A government failure happens when the government tries to help a market that is failing in the economy, but in turn creates more harm to the market. First a failing market that does not produce positive outcomes for society has to happen for the government to step in.