Government's Role in Correcting Market Failures - Assignment Example

GOVERNMENT’S ROLE IN CORRECTING MARKET FAILURES In a world where the strength of a nation is determined by how well itcan sustain its population while maintaining a balanced trade relation with other nations, the stability of the economy ought to be constantly checked by the government of the day. The key aim of economists the world over is to satisfy the infinite needs of humanity without putting too much strain on the available resources. Due to this reason, participation of the government in regulating resource utilization is necessary to avoid the catastrophe of market failure i.e. the state of surplus (or extremely limited) supply or production of goods and services.

An efficient market is one in which marginal benefits and marginal costs are equal. However, other factors such as imperfect competition in a market usually result to a situation where the output of the market falls short of the efficiency level. It is in such cases and in others such as to improve the performance of the economy as well as to foster equitable wealth distribution that the intervention of the government is crucial to rectify the potential negative effects of such imbalances. The major role of the government is to ensure there is development, both at personal and national level, in the economic sense.

However, forces exist in the market that tend curtail the attainment of fair and healthy economic development in any nation. For instance, the issue of market failure that result from such factors as externalities, asymmetric information, and imperfect information, etc. are of great concern not only to economists, but to governments as well. Externalities refer to the benefits or costs of economic activities that fall upon people with no direct link to the activity itself, but which is not reflected in the market valuation (Beghin, 2013).

To rectify the harmful effects of externalities, economists agree that imposing taxation on the externality-generating agent is necessary, which is a government policy. Beghin defines asymmetric information as a situation where one partner in a transaction has more knowledge regarding certain aspects of the business compared to the other. A good example is the insurance sector where failure is attributed to either adverse selection or moral hazard. The former refers to a case where the insurance company is unable to distinguish between the sick and the healthy and hence assumes that only the sick will seek cover.

The latter refers to a scenario where an individual with insurance cover adopts a reckless lifestyle based on the argument that the insurance company will bear the costs in the event that an accident occurs to him. In either cases, government intervention in the form of ratifying policies that allows for fair determination of claims to be awarded that captures the interests of both the firm and the community is imperative. Most nations have embraced the idea of laissez faire in their economies.

While a free market devoid of interference from the government is virtually healthy, practical results suggest otherwise. Investors put their money in ventures aimed at satisfying human needs, while at the same time accruing profits for their investments. A free market policy advances for profit making as the major objective, a loop that may be exploited to the detriment of the consumers and competitors as well. Additionally, the provision of goods and services by private investors whose main objective is to make profit enhances the proliferation of monopolies as the major powers in the market.

The resulting gap warrants the intervention of the government in order to avoid having a market characterized by monopolies. For instance, there is a wide belief that Google operates as a monopoly. However, this is not true as we have other search engines such as Bing that is owned and operated by Art. Sioshansi (2008) observes that generally governments adopt price caps as a means of regulating the establishment of monopolies. It is worth noting that the formation of monopolies majorly relies on pricing as a means of driving competitors out of the market, thus by setting the limits within which a product is supposed to be traded, the government ensures that upcoming players in a given industry can survive the stiff competition posed by established player(s).

The prosperity of a nation is determined by the strength of its purchasing power, which in turn is a reflection of the size of the economy, based on the amount of resources available to the citizens, and the domestic product per head. The regulation of these aspects in most economies rely on the availability of natural resources and the ownership of production means, and labor as the core component. However, the sustenance of economies require the branding of some products as public goods.

The issue of branding a product or a service as being a public good is subject to discussion. Kalihoff (2011) defines a public good as a product is non-rival in consumption, i.e. one person’s consumption does not leave the other with less of it or nothing at all. For example, a mango is a rival good since if one person eats a mango another person cannot eat the same mango. On the contrary, a statistics lecture is a non-rival good since if one is sitting in a classroom listening to the lecture, the amount of information other students in the same room has access to is not affected by the former’s presence.

While the government plays a critical role in the provision of public goods, it is worth noting that not all public goods are termed so due to this argument. Goods are characterized as public due to certain aspects, such as being non-excludable i.e. the impossibility to provide a good without others enjoying it as well. The need for government intervention is because public goods are prone to misuse by the very people it is designed to benefit, which might result into negative externalities, whose effects had been broached earlier.

Government plays a critical role in shaping the market and economy of any nation. In order to avoid such negative impacts of market failures such as negative externalities, flourish of monopolies in the market as the major powers, as well as the effects of public goods on the economy is imperative. However, it is worth noting that the issue of market failure and government involvement in market affairs based on attempts to correct such resultant impacts is still debatable. While other market analysts see government intervention as inappropriate, the analysis presented in this paper lays bare the benefits of such moves to the common good of the economy, and thus should receive maximum support from the community.

References Beghin, J. C. (2013). Non tariff measures with market imperfections: Trade and welfare implications. Kallhoff, A. (2011). Why democracy needs public goods. Lanham, Md: Lexington Books. Sioshansi, F. P. (2008). Competitive electricity markets: Design, implementation, performance. Amsterdam: Elsevier.