Government intervention can also extend to public goods that cause the private-decision rule to fail in terms of the efficiency rule. According to Julianle Grand (1991, p. 426), externalities are the focus of market failure, in that they focus on a third party, otherwise uninvolved in the transaction, that is affected by production or consumption. Grand distinguishes between the benefits and costs to such third parties; where the former entails a positive effect to the third party and the latter a negative effect. Markets can then fail when a lower level of activity occurs in the market than is socially efficient, while an overprovision of activity with external costs will also result in greater activity than is efficient.

Grand also mentions increasing returns to scale (Grand, 1991, p. 427), which entails that the average production costs fall with the increase of the production scale. This could lead to market monopolization by large firms that receive the greatest competitive advantage as a result. Grand mentions the transportation industry as a result.

The imperfect information issue in market failure implies that there exists some miscommunication between the customer and producer. Producers, such as medical doctors and pharmacists, for example, are in an advantageous position regarding knowledge about their patients' health, and can therefore exploit this knowledge to their own advantage. Doctors have an interest in providing as many services as possible, as their income level depends upon this. The market is thus oversupplied and concomitantly inefficient.

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.

Sources

Grand, Julianle (1991, Oct). The Theory of Government Failure. British Journal of Political Science 21 (4), pp. 423-442. Retrieved from JStor. http://links.jstor.org/sici?sici=0007-1234%28199110%2921%3A4%3C423%3ATTOGF%3E2.0.CO%3B2-Y

Mrozek, Janusz (1999, Autumn). Market Failures and Efficiency in the Principles Course. The Journal of Economic Education 30 (4), pp. 411-419. Retrieved from JStor. http://links.jstor.org/sici?sici=0022-0485%28199923%2930%3A4%3C411%3AMFAEIT%3E2.0.CO%3B2-1

Zerbe, Richard O & McCurdy, Howard E. (1999, Autumn). The Failure of Market Failure. Journal of Policy Analysis and Management 18 (4) pp. 558-578. Retrieved from JStor. http://links.jstor.org/sici?sici=0276-8739%28199923%2918%3A4%3C558%3ATFOMF%3E2.0.CO%3B2-2