Market Failures and Government Role

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.