Question

In attempts to correct market failures, a government policy is proposed. Assume that the costs of a potential new government program will be paid now by many individuals. The benefits will be received by a relatively small number of individuals several years in the future. Why might these conditions affect a government's success or failure in attempting to decide whether or not to establish the new program?

Answer 1

The above statement can be justified by analyzing the concept of Government Failure while correcting Market Failure:

· Market Failure in any economy occurs when there is in-efficient allocation of resources in the market which leads to Pareto-Inefficient Outcome. Many cases of Market Failure include abuse of monopoly power, negative externalities, lack of public goods, underproduction of merit goods, asymmetric information, etc.

· Imposing general taxes, Subsiding production , lowering prices, providing loans assignment of property rights, etc. are few ways through which any government can intervene to correct the above mentioned market failures. However, market failures are necessary but not always a sufficient condition to justify government intervention.

• Any government failure emerges when it creates large efficiency losses and deviates from the goal of generating greater social benefits. There have been cases in countries like US where government policies have created economic efficiencies where significant market failure do not appear to exist, such as some antitrust laws & economic regulations that have raised firm’s cost and generated economic rents for various interest groups at the expense of consumer welfare.
• There have been cases when, government program/policy have achieved success in correcting market failures but has either sacrificed substantial net benefit or in some cases has actually reduced the social welfare by wasting important resources by application of their policies.
• There are also many evidence that public sector financing have failed to rectify the negative externalities such as highway or airport congestion, as these have resulted in large subsidies financed by general public taxes thereby creating additional inefficiencies such as the cost of raising public funds.
• Some of the other reasons on which the government might fail to create significant social benefit in the future:

1. Presence of Excess Bureaucracy

2. Lack of profit incentives

3. Lack of market discipline of seeking to maximize the use of limited resources

4. Accumulation of public debt, etc.

Many a times, during market failure government actions are needed but these are compromised by agency shortcomings and other political forces, which suggests that during a market failure the market participants have greater incentives to correct the situation than the government has the incentives to correct the failures.

This makes it important to decide whether or not the new government program should be established.