Role of Governments in Correcting Market Failure – Essay Example

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The paper "Role of Governments in Correcting Market Failure" is a worthy example of an essay on macro and microeconomics. Market failures are a set of factors under which the economy does not allocate resources efficiently (Dodson & Wodon, 2008) and may exist due to a myriad of various factors such as; public goods, monopoly, externalities and information issues. The market does not define how individuals pay for use of public goods. The government can overcome such failure by revealing people’s preferences for public goods through a political process. The concept of externalities assumes that the production of some goods may result to positive or negative effects that may not be reflected in their price, this argument presents a ground for government intervention as without it the market may over or underproduce contingent to whether the externalities were positive or negative. Correcting such circumstances necessitates the government to help the ‘invisible hand’ to estimate what self-correction mechanism the market would have applied in its absence. Different types of market failures exist with each type requiring a specific approach to correct it (World Bank 1997). The three major types include; information asymmetry, positive and negative externality and monopoly (Pate and Wankel, 2014).

If there is an existence of market failures, the private market efficiency breaks down (Rabin, 2003). Thus from an economic perspective, it provides justification for government supply of particular goods and services to restore market efficiency. Market failures often present an opportunity for public intervention, thus correcting such failures is also referred to as the business of government e.g. pollution is the undesired byproduct of a needed or desired end product during the manufacturing process. Individuals residing in areas around manufacturing plants would be willing to have the waste material reduced but lack the capacity to do so or it is just a difficult process. The government can act upon the market failure by imposing a tax on polluting firms for the cost to society of their waste. Such tax makes the company internalize the external costs in their manufacturing decisions. Though the emissions may continue, it would be a much lower level.
Government has a potential role to play when there is a market failure (Tucker, 2012). Richard Musgrave states another role for government as stabilization and distribution. Stabilization is in reference to macroeconomic problems such as; inflation, unemployment, monetary policy, interest rates, and international trade. Stabilization is justified on the failure of the market to create a level of aggregate demand that can maintain a reasonably stable economic growth with full employment (Tanzi, 2011). According to Keynes (in Tanzi, 2011), a government should play a role in enhancing levels of investments and savings that are enough to maintain full employment in the economy.
Distribution refers to issues in the distribution of income and other resources among communities and societies Musgrave adds that there are other concepts relevant in determining government programs and budgets (Rabin, 2003). Arthur Okun added that in most policy decisions, there seems to be a trade-off between equity and efficiency e.g. in healthcare for pro- efficiency. If left to the private market segment, it would be for those who can afford quality services, those who cannot afford will not be attended to. Pro- equity would argue for health care access to all; however, this would mean higher taxes through government intervention to cater to public provision of healthcare. The government should ensure that growth and income are distributed in an equal and fair manner without compromising the efficiency of the markets to distribute resources (Dodson & Wodon, 2008).
Diffusion of formal standards, the government can play a role in correcting market failure by ensuring that some standards are network goods and the importance of adopting the standard increases with the number of adopters. The high cost of adopting stands prohibits critical mass adoption; thus, the market fails to reach the numbers needed to ensure that individual benefits of standards exceed their cost (Guasch, 2007). Governments can correct these failures by creating programs and policies that enhance widespread diffusion of standards. Though it can achieve this through voluntary diffusion, mandatory standards have a better effect.
Markets are efficient if companies operating in such an economy are manufacturing goods and providing services at a minimum cost and if consumers who value the goods have access to them. When this does not happen, market failure exists. If the government can offset the problems at a lower price than the private firms and benefits exceed the expenses then the government intervention to correct market failure is warranted (Landler& Weisbrod, 1978). In my opinion, the government should work to correct market failures. If firms are left to operate monopolies, regular citizens will not afford the same services that rich individuals enjoy especially in the fields of health care, mass transportation, electricity, and education.

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