Why does the government need to handle market failures?
Market failures indicate a scarcity of resources, so it must be managed
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 do not tend to fix market failures due to individuals and produces making decisions based on their own self interest
The government needs to handle market failures because the natural forces of a free market do not always efficiently address them. When market failures occur, resources are not allocated optimally or efficiently, leading to economic inefficiencies and negative externalities.
Market failures can happen for various reasons, such as when goods or services are non-excludable (meaning it is difficult to prevent people from benefiting without paying) or when there is a lack of competition due to monopoly power. These situations can lead to underproduction or overconsumption, resulting in market inefficiencies.
The government intervenes to correct market failures by implementing regulations, taxes, subsidies, or other policy measures. For example, in cases of negative externalities like pollution, the government can impose taxes or regulations to internalize the costs and encourage firms to reduce pollution. Additionally, the government can provide public goods, such as national defense or public infrastructure, which might not be efficiently provided by the private sector.
Ultimately, the government's role in addressing market failures is to ensure the efficient allocation of resources, promote social welfare, and prevent economic distortions that could arise due to self-interested decision-making by individuals and producers in a free market.