Question

Most introductory economics textbooks have a section on “market failure.” It is here that students learn that markets may fail to achieve their potential – leaving people worse off than they theoretically could be. The existent of market failure is often taken as an excuse for government intervention to do whatever markets fail to do. In just a couple of sentences, explain why economists (and others, particularly politicians) must accept the possibility of “government failure” as well? That is, tell me why government solutions to perceived market “failures” may themselves fail to achieve their own stated goals? The U.S. Drug war is an apt example of a discrepancy between a stated political policy goal and the actual attainment of that goal.

Answer 1

1) In an open economy, the fight between state and market is not new. Economists should understand that "government policies" also have loopholes. One of the examples can be lowering or devaluing one's currecy to manage the global market failures by a country. This always backfires. When you devalue the currency you make imports expensive. This hurts the industries working in the domestic country. This finally leads of Net Export imbalance and capital defecit in the BOP. These should also be considered as the "government failures" which are actually also the trigger points of market failures. Similarily by expansionary and constractionary monetary policies, the government manipulated the demand and supply which sometime do not really help the markets. These must also be counted under government failures.