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
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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
“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).
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.
For example, supermarkets may use their dominant market position to squeeze profit margins of farmers,” (Pettinger, n.d.). In this example, farmers have nowhere else to go and sell their product but to the monopoly. Therefore, the monopoly knowing this, can refuse to buy the product of the farmer unless it is at an extremely low and unreasonable price. The farmer will then be put in financial turmoil because of the corruptive behavior that monopoly is exerting. When this abusive behavior is observed by monopolistic companies it should be the job of the government to protect the suppliers from this. Consumers are clearly not the only ones that can be negatively impacted by the abusive power of monopolies but suppliers as well. These suppliers cannot sit around, fingers crossed that the market will fix itself by someone jumping in and being a competitor to this industry as them and their families go more into debt and turmoil. That is the reason why the government should fulfill its task of being for the people and protecting these suppliers from the monopoly
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).
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.
Throughout the years, the government seeks to promote Canadian content by strengthening and editing media policy. Due to Canada's small population, the market for Canadian media faces obstacles such as market failure. Market failure does not mean that the market is at a failure but it occurs when the market cannot support sufficient domestic media to generate profit. There are many factors that influence market failure. Market failure can be a result of not reaching everyone who might wish to consume it.
...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.
This essay will examine the concept of market failure and the measures that governments take remedy the failure of the market.
need of government intervention and only through the price mechanism. Free Market Economy The price mechanism can only function within a free market economy.
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
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.
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.