Why do economists generally prefer “market-based” policies to “command-and-control” (regulatory) policies to deal with “market failures”?

Expert Solution

Economists prefer market-based policies like taxes, subsidies,etc. because it helps the firms to internalize the external costs and benefits (in the case when market failure arises due to externalities) that cause market failure.

Command and control methods are prescriptive in nature. Under command and control methods, limit on emissions, prescription of technology to be used, etc. are used to correct for market failure.

Economists criticize the command and control method because it hinder the firm's ability to innovate. When given liberty ,the firm's innovate and use the least costly methods but the command and control system doesn't provide that freedom.

The market based instruments on the other hand gives the firm liberty to innovate how to use technology, equipments, etc. while trying to correct for market failure.

The market instruments lead to correction of market failure at least possible cost and thus, economists prefer it.

Rahul Sunny answered 7 months ago

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