Question

Explain how the distributional considerations and the failure of the market due to existence of public goods and externalities lead to government intervention in the economy. Provide a summary of policies used by the government to address these types of market failures. You should critically evaluate these policies from the viewpoints of fairness and efficiency. You should also explain and critically evaluate the use of cost-benefit analysis by the decision makers working for the government to evaluate public the expenditures

Answer 1

Market failure exists where demand and supply forces do not provide efficient results. In such situation, market either underproduces or overproduces. for dealing with situation created by the market failure, government intervention is inevitable to deliver efficient outcome.

Following actions are taken by the government to provide efficient results:

Taxes and subsidies: Government imposes taxes and provides subsidies to deal with negative and positive externalities respectively. Subsidies are provided if there exists positive externalities. Subsidies promote more production and helps to deal with problem of under production. On other hand, government imposes taxes to address issue of negative externalities.

Further, government also makes provision of public goods where demands do not truly reflect social demand. thus, government makes provision of such goods.

Overall social benefits in provision of public goods are relatively larger and can not be judged on monetary terms.

such projects provide monetary as well as non monetary benefits to society at large.