Economics of Market Failure :: Government Intervention

Market failure has become an increasingly important topic for students. In simple terms, market failure occurs when markets do not bring round economic efficiency. in that location is a clear economic case for judicature intervention in markets where nigh form of market failure is taking place. Government can justify this by saying that intervention is in the public interest. Government intervention occurs when markets are not working optimally i.e. there is a Pareto sub-optimal allocation of resources in a market/industry. In simple terms, the market whitethorn not always allocate barely resources efficiently in a way that achieves the highest total social welfare.There are plenty of reasons why the normal operation of market forces may not lead to economic efficiency. humans GoodsPublic Goods not fork outd by the free market because of their two main characteristics Non-excludabilitywhere it is not possible to provide a good or service to one person without it thereby bein g available for others to enjoy Non-rivalrywhere the consumption of a good or service by one person will not keep back others from enjoying itExamples Streetlighting / Lighthouse Protection, Police services, Air defense systems, Roads / motorways, Terrestrial television, floodlight defense systems, Public parks & beachesBecause of their nature the private sector is unlikely to be willing and able to provide public goods. The government thence provides them for collective consumption and finances them through general taxation. deservingness GoodsMerit Goods are those goods and services that the government feels thatpeople left to themselves will under-consume and which thence oughtto be subsidized or provided free at the point of use. some(prenominal) the public and private sector of the economy can provide moral excellencegoods & services. Consumption of merit goods is thought to generatepositive externality cause where the social benefit from consumptionexceeds the private benefit.ExamplesHealth services, Education, Work Training, Public Libraries,Citizens Advice, InnoculationsMonopolyFew modern markets meet the stringent conditions required for a utterly competitive market. The existence of monopoly power is oftenthought to create the potential drop for market failure and a need forintervention to correct for some of the welfare consequences ofmonopoly power.The classical economic case against monopoly is that Price is higher and return is lower under monopoly than in a competitive market This causes a net economic welfare loss of both consumer and producer overindulgence Price marginal cost - leading to allocative inefficiency and a pareto sub-optimal equilibrium. See also the canvass page on economic efficiency Rent seeking demeanor by the monopolist might add to the standard