Market failure definitions and government intervention approaches

Market Failure and Public Policy

The potential of market failure is a phenomenon that is commonly considered in a free market economy. When a market fails, it is the task of economists and policy makers to find the reasons for such failures, while the government is expected to intervene in a manner that is targeted towards mitigating the effects of market failure. Theorists appear to disagree somewhat regarding the exact way in which such intervention should take place, but it is commonly conceded that the government should have some role in mitigating market failure.

Market Failure and Public Policy

According to Janusz Mrozek (1999, p. 411), markets fail because of a violation of efficiency. The author holds that all market transactions can be classified according to an efficiency rule: it is either efficient or inefficient. The efficiency rule determines the extent to which marginal benefits to society equal or exceed marginal costs. This efficiency is often influenced by private-decision rules. When the efficiency rule is then violated, the government can improve the efficiency of the economy by altering individual markets. Mrozek emphasizes that the efficiency rule should be applied by considering a unified view of markets and how they operate, with an all-inclusive consideration of the various elements involved. In this way, the most efficient solution can be found to mitigate market failure.

Zerbe and McCurdy (1999, p. 561) refer to efficiency as market transactions that are optimal in operating price; they are costless. Failure to achieve costless transactions, or transactions at less than cost, means that market failure occurs. The authors also point out however that this tends not to occur in the real world, and that costs occur whenever transactions take place. Externalities and market failures therefore occur to some degree whenever transactions occur. These authors then consider market failure and its definition in more specific terms than Mrozek. According to the authors, markets fail as a result of various elements: the market fails to produce public goods; it produces externalities; gives rise to monopolies; disenfranchises other parties by means of asymmetries in information; or by undesirable income distributions. According to the authors, these are all forms of externalities; in other words, they are nonmonetary effects and were not considered during the decision-making process. Externalities, as mentioned above, take place when transactions are in progress.

According to Zerbe and McCurdy (1999, p. 561), a degree of market failure is inevitable when concluding a transaction. However, some market failures are significant and require government attention.

Effective Government Intervention

While some industries elude government intervention, industries with a specific public interest such as transportation and medical care may indeed lend themselves to more effective intervention methods. In terms of transportation, the government may for example establish measurements against market monopolization. Such monopolization is inefficient in terms of competition and the public good, and therefore merits intervention by the government.

In terms of health care, there are a variety of measures that a government might take. One of these is public education. The public will benefit from education regarding the structures of medical insurance and other services provided by medical professionals. The government can then establish systems by which the public can self-educate in this regard. Specific conditions can for example be the target for such education to ensure that the public is not overcharged for services they need or coerced into paying for services that they do not need.

When markets fail to a great degree, the government is obliged to intervene in a way that is both efficient and conducive to the general public good. In this way, the public will also perceive such a government as one that cares for the well-being of its citizens. Indeed, monopolization and a lack of adequate information are two areas in which the public tends to be victimized by large businesses and institutions. While these are needed and perceived valuable services, it is easier for large institutions to deceive and victimize the public.

It is therefore the obligation of the government to intervene in a targeted and effective way in order to ensure that the balance between public benefit and cost remains as close to equilibrium as possible. Even though some degree of market failure is therefore inevitable, it is nevertheless vital to ensure that the public receives not only protection from the government, but also the value that merits the investments made in goods and services.

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