Question

Identify a possible market failure and discuss the appropriate forms of government intervention to overcome the market failures that exist in this market structure.

answer should be broad

Answer 1

Market failure is the economic situation defined by an inefficient distribution of goods and services in the free market. Furthermore, the individual incentives for rational behavior do not lead to rational outcomes for the group. Put another way, each individual makes the correct decision for him/herself, but those prove to be the wrong decisions for the group. In traditional microeconomics, this is shown as a steady state disequilibrium in which the quantity supplied does not equal the quantity demanded.

EXAMPLE:

One of the very recent market failures (still continuing) is the spread of COVI-19 Corona Virus. This has lead to a disproportion in demand and supply and the economy is in disequilibrium. This market failure is particularly because of an Externality which is a negative externlity. The outcome of this is that there is high demand of food products and the supply is less because production is not taking place. Thus, government intervention becomes essential in such a market failure.

The various forms of government interventions could be:

1. Use of legislation

One of the ways that governments can manage market failures is by implementing legislation that changes behavior. For example, the government can ration the amount which individuals can buy at a point of time, to prevent hoarding.

2. Price mechanism

Price mechanisms are designed to change the behavior of both the consumers and producers. For products that are essential like wheat, rice, pulses etc, the government can provide them at very minimal prices during this pandemic in order to correct the market failure in the coming time.