Market Failures and Government Role

This article discusses the role of government in tackling market failures such as incomplete markets, information failures, public goods, and other externalities. It also suggests various measures that can be taken to control market failures.

MARKET FAILURES AND GOVERNMENT ROLE
Role of Government in tackling market failure

2MARKET FAILURES AND GOVERNMENT ROLE
There has always been debate on the degree of regulation that governments should enforce on
the markets. Research by Ajefu & Barde (2015) reveals that where markets do not resemble
characteristics of perfect competition, government intervention is necessary to ensure the
efficient allocation of resources. Again research by Mazzucato & Penna (2015) uncovers the
limited role played by the standard market failure framework in justifying government
intervention beyond resolving market failures.
As per Ajefu & Barde (2015), the reasons leading to market failure are incomplete markets,
information failures, public goods, and other externalities. Incomplete markets restrict the
availability of goods to those who need it but cannot afford. For example, the USA
government maintains the provision of health insurance to citizens with lower affordability
(Barr, 2016). Certain technology goods are characterised by information asymmetry between
seller and buyer due to the sensitivity of information like the Telecom sector. Public goods
markets like defence services are usually necessary services and have no competitors.
Externalities or effect of a person’s activities on another person are not captured by market
price and may result in excess supply or demand.
Exogenous monopoly power due to increasing returns to scale can be controlled through
restrictive trade practices regulation like the recent price cap of the UK gas and electricity
industry (Jones, 2019). Another option is public ownership of these powers like the Indian
government regulating refining and distribution of gas and gasoline products. A stringent tax
policy proportionate to the output produced can control the powers of the monopoly (Vogel,
2018). The government can ease trade policies and also attract FDI in the industry to increase
competition. Endogenous monopoly due to lack of competition can be tackled through
proactive free trade and competition policies.

3MARKET FAILURES AND GOVERNMENT ROLE
Externalities are the major reasons of market failures (Ajefu & Barde, 2015). These can be
controlled through social control measures like moving factories out of big cities. The
government can use subsidies and taxes like the lower cost of drugs for a critical illness like
heart ailment and discouraging smoking through higher taxes on cigarettes (Sullivan, 2017).
Positive externalities can be encouraged through subsidies or tax concessions like special
economic zone programmes by most countries in the world. Public goods which are non-
tradable should be only provided by public authorities, for example, police, firefighting and
defence services. These are free rider services which can be met through tax revenues
(Mazzucato & Penna, 2015). Market players exhibiting alarmingly increasing returns to scale
may distort markets through overproduction and hence should be taxed or regulated through
price control. Indivisible goods and services like roads, street lights etc. should be overseen
by civic authorities by charging the cost to local residents. Common property rights on public
properties like parks, libraries etc. can be regulated by charging the damages to local
residents using the property.
While markets tend to move towards equilibrium, experts count on government regulations
and intervention for addressing imperfections. Again others postulate that government action
should be more than reactive to failures and also check whether steps taken by government
leave everyone in a better position than normal human action in the market.

4MARKET FAILURES AND GOVERNMENT ROLE
References
Ajefu, J. B., & Barde, F. (2015, June). Market Efficiency and Government Intervention
Revisited: What Do recent Evidence Tell Us? Journal of International Business and
Economics, 3(1), 20-23.
Barr, D. A. (2016). Introduction to US Health Policy: The Organization, Financing, and
Delivery of Health Care in America. Baltimore: JHU Press.
Jones, R. (2019, Jan 2nd). What is the energy price cap and how does it work? Retrieved Jan
25th, 2019, from The Guardian:
https://www.theguardian.com/business/2018/dec/31/what-is-the-price-cap-and-how-
does-it-work
Mazzucato, M., & Penna, C. C. (2015, January 31st). Beyond market failures: The market
creating and shaping roles of state investment banks. Retrieved January 25th , 2019,
from Econstor: https://www.econstor.eu/bitstream/10419/109991/1/817011625.pdf
Sullivan, C. (2017, Mar 9th). Budget cigarette tax targets brands popular with young
smokers. Retrieved Jan 25th, 2019, from Financial Times:
https://www.ft.com/content/66e5891e-0410-11e7-ace0-1ce02ef0def9
Vogel, S. K. (2018). Freer Markets, More Rules: Regulatory Reform in Advanced Industrial
Countries . Ithaca: Cornell University Press.