5.1. MARKET FAILURE & Government Intervention
Market Failure
A market failure is when the free market fails to allocate scarce resources efficiently. We have two types of market failures.
There are various reasons why markets fail and these will be discussed in this section. They include:
A market failure is when the free market fails to allocate scarce resources efficiently. We have two types of market failures.
- Complete market failure, whereby there is a missing market (nothing is supplied).
- Partial market failure whereby there is a market for this good or service but it does not function properly resulting in a misallocation of resources.
There are various reasons why markets fail and these will be discussed in this section. They include:
- Public goods
- Positive and negative externalities
- Merit and demerit goods
- Market imperfections, such as imperfect information, immobility of factors etc…
- Monopoly
- Inequality
- Factor immobility
Government Intervention
In many of the market failures above, there is a role for governments to intervene in the market in order to correct it. However, the role that governments take often depends upon the government’s view on how a government should act in an economy.
Laissez faire economics says that the market is the best way to allocate scarce resources. Therefore, markets should be allowed to perform freely and without government intervention. Market forces will determine the price and quantity. The governments should stick to protecting property rights, keeping law and order and maintaining a stable value of the currency. Free market economists argue that if a government intervenes in a market then it causes an inefficient allocation of resources. They believe the government should not intervene in the market unless there is a market failure.
Other economists would argue that the government should step into markets before they fail and that preventative action rather than ‘sort the market out when it’s failed’ action is a better approach. Also, some economists would say that the market does not produce socially optimum outcomes and the government should intervene in the market to ensure that everyone in society is better off.
Opinions on what role the government should have in an economy depends on normative statements and are constantly debated in parliament and the media.
In many of the market failures above, there is a role for governments to intervene in the market in order to correct it. However, the role that governments take often depends upon the government’s view on how a government should act in an economy.
Laissez faire economics says that the market is the best way to allocate scarce resources. Therefore, markets should be allowed to perform freely and without government intervention. Market forces will determine the price and quantity. The governments should stick to protecting property rights, keeping law and order and maintaining a stable value of the currency. Free market economists argue that if a government intervenes in a market then it causes an inefficient allocation of resources. They believe the government should not intervene in the market unless there is a market failure.
Other economists would argue that the government should step into markets before they fail and that preventative action rather than ‘sort the market out when it’s failed’ action is a better approach. Also, some economists would say that the market does not produce socially optimum outcomes and the government should intervene in the market to ensure that everyone in society is better off.
Opinions on what role the government should have in an economy depends on normative statements and are constantly debated in parliament and the media.