Question

what are the best ways to solve market failure problems and why?

Answer 1

Measures to solve market failure problems are as follows :

1.Aiming at removing unfair competition,preventing unfair price discrimination and fixing prices vis-a-vis competitive prices leads to control of monopoly power.

2.Social control measures and use of taxes and subsidies aid in removing the divergence between private and social costs and benefits.

3.The state should make people share the costs of public goods so that everyone is made better off as benefits of public goods are indivisible.

4.The solution to the problem of indivisibility in the case of goods and services used jointly by more than one person is that local bodies may either spend themselves on the maintenance of such services or tax the residents who are availing these services.

5. Market failure in the case of missing or incomplete markets where two commodities are jointly produced may be corrected by  a separate market for each in which each good and service can be traded to the point where the social and private marginal benefit equals the social and private marginal cost which will further lead to optimal allocation of resources.