In micro-economics market failure is characterized by resource misallocation and subsequent Pareto inefficiency. Just as the invisible hand falters, so is the case that the unregulated markets are incapable of solving all economic problems. In laissez-faire economy, market models mainly monopolistic, perfect competition and oligopoly are expected to efficiently allocate resources for the “welfare benefit” of the society. However individualistic and selfish private interests divert the public benefits thereby prompting government intervention to correct the imperfection which may lead to disastrous economic impact. Although corrective intervention policies by government may not necessarily address the underlying imperfection induced by private sector inefficiency, it still becomes a necessary remedy to benefit the wider public if private entities are not allocating efficiency. Furthermore, as the largest contributor of the Gross Domestic Product, poor and untimely corrective measures could signal the failure of both the private and public interests. Effectiveness of the policies and mechanisms designed by the state in market intervention are fundamental in correcting any perceived market failure. Intervention however does not guarantee effective remedies expected by the economy and could lead to deeper market failures if the regulations “crowd out” the private sector but is the viable approach to address market failure.
Market Failure Causes
In analysis of market failure, a distinction should be drawn between partial and complete market failures. While the later implies a functional market with ineffective function the former describes a complete non-functional market with inability to supply the market with required goods o...
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...nment intervention in market economies always works effectively. However, given that its role in and responsibility in ensuring the welfare of its citizens is inherently, intervention, support, collaboration and corporation is always necessary in proper management and functioning of economic markets.
Rosen, Harvey. Public Finance, 5th edition. New York: Mc Graw Hill Book Co. 2005.Print
Stiglitz, Joseph. Economics of the Public Sector, 3rd edition. New York: Norton & Co., 2000.Print
Tullock, Gordon. “Non-prisoner’s Dilemma.” Journal of Economic Behavior and
Organization, 2005(2): 23-45.
Winston, Clifford. Government Failure versus Market Failure Microeconomics Policy Research and Government Performance. United States: Brookings Institution Press.2006.Print
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