Why does the government need to handle market failures?(1 point)
Responses
Market failures occur when goods or services are excludable.
Market failures occur when goods or services are excludable.
The natural forces of a free market tend to over correct for market failures.
The natural forces of a free market tend to over correct for market failures.
The natural forces of a free market do not tend to fix market failures due to individuals and producers making decisions based on their own self interest.
The natural forces of a free market do not tend to fix market failures due to individuals and producers making decisions based on their own self interest.
Market failures indicate a scarcity of resources, so it must be managed.
Market failures occur when the free market system does not allocate resources efficiently or produce optimal outcomes for society. This can happen for various reasons such as externalities, public goods, monopoly power, information asymmetry, and incomplete markets.
The government needs to handle market failures because:
1. Providing public goods: Market failures such as the non-rivalry and non-excludability of public goods make it difficult for the private sector to provide them efficiently. The government steps in to provide essential public goods like national defense, infrastructure, and education that benefit society as a whole.
2. Correcting externalities: Negative externalities, such as pollution or traffic congestion, result in costs imposed on third parties who are not involved in the transaction. The government may impose regulations, taxes, or subsidies to internalize these costs and incentivize individuals and businesses to consider the societal impact of their actions.
3. Preventing monopoly power: In cases where monopolies or oligopolies emerge and abuse their market power, the government may intervene to promote competition, protect consumers, and ensure fair pricing.
4. Addressing information asymmetry: In certain markets, such as in healthcare or financial services, there is often a significant imbalance of information between buyers and sellers. Government regulation and oversight can help protect consumers from fraud, ensure transparency, and promote fair competition.
5. Managing incomplete markets: Some markets may be incomplete or fail to exist due to multiple barriers or uncertainties. The government can create frameworks, provide funding, or play a direct role in areas like research and development, infrastructure development, or social safety nets to help overcome these market failures.
Overall, the government's role in handling market failures is to ensure the efficient allocation of resources, protect public welfare, and create a level playing field for businesses to thrive.