Government and Market Failure Essay

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In micro-economics market failure is characterized by resource misallocation and subsequent Pareto inefficiency. Just as the invisible hand falters, so is the case that the unregulated markets are incapable of solving all economic problems. In laissez-faire economy, market models mainly monopolistic, perfect competition and oligopoly are expected to efficiently allocate resources for the “welfare benefit” of the society. However individualistic and selfish private interests divert the public benefits thereby prompting government intervention to correct the imperfection which may lead to disastrous economic impact. Although corrective intervention policies by government may not necessarily address the underlying imperfection induced by…show more content…
Competition failure or monopoly may result from natural monopoly where it costs incurred in production becomes lower when only one firm is involved in production than several firms producing the same output. In a monopolist market under-production, higher prices become dominant contributing to market inefficiency. Winston cites cases of misuse of monopoly power can lead to market failures and sometimes may lead to acute shortage of essential commodities (130). Coordination failures by private markets are perceived to contribute significantly in inefficiency. Negative externalities like environmental pollution and positive externalities like focusing on public benefits and ignoring the private benefits significantly contribute to market failures. Fundamental questions have been raised to determine the appropriate time government intervention is required and the magnitude of inefficiency to warrant supposedly intervention or to let the market correct itself. Stiglitz, argued that inefficient government microeconomic policies to address the market gap often tends to exacerbate the existing problem or yield unproductive results in the economy (34). Market failure Correction The principal of Pareto efficiency dictates that market failure is a product of making other individuals worse than they were found. To
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