Question

Many policy analysts believe that government should only intervene when market failures exist. The readings and class discussion discuss several different types of market failures that provide rationales for why government provides a wide range of goods and services. For each of the following, describe the rationale(s) that support government intervention Be as specific as possible and use the terms and concepts to identify one or more rationales for each government action:   

a. Federal government requiring nutrition labels on foods.

b. State governments banning smoking in all public places.

c. Local governments zoning land use.

d. Local governments providing trash collection services to residents.

Answer 1

a. Information assymetry: In the market for food, the producer has much more information about the nutritional value as compared to consumers. Government action is intended towards reducing the information assymetry and bringing in transparency.

b. Negative externalities and public good: Negative externalities occur when a transaction generates a negative impact on a party not directly involved in the transaction. Smoking in a public space causes harm to others and leads to an overall negative societal impact.

c. Negative externalities: Land zoning leads to overall positive societal benefits as it helps in overall city planning, making sure that the overall population is not negatively impacted by the excessive development.

d. Non rival and non excludable public good. If trash collection is considered a public good, it means that residents who are not paying for the trash cannot be prevented from using the facility. If it was to be provided by a private player, it would lead to free rider problem - insufficient funds making it unprofitable for private company to provide it. Even if it was excludable, there would be negative externality on the neighbourhood in terms of waste production. Hence, government intervention is required for the overall societal benefits.