Question

In regard to the free market and government intervention, explain the meaning of market failure and government failure

Answer 1

ANSWER:

In a free market, market failure in an economy refers to a situation where in the allocation of goods and services by a free market is not efficient, and usually leads to a net social welfare loss. It can occur for numerous reasons, including lack of supply to meet demand, inefficient delivery of goods, drastic under-pricing or overpricing, or overinvestment in aspects of business that fail to give results. These are typically the businesses fault because of improper long-term planning or poor customer research.

The government failure occurs from an attempt to solve market failure however creates a different set of problems. The government failures cannot arise unless market failures have already happened. When the government intervenes itself in the economy in an attempt to rectify an existing market failure, it can sometimes resolve the failure, or may lead to further inefficiency, such that the market failure is not resolved.