Question

Relate these questions and your responses to types of “market failure.”

1. What role do you think government should play in our economic system to maximize the wellbeing of our citizens? Provide specific examples of when you think government involvement is warranted to improve the answers to the 3 main economic questions.

Answer 1

Let's see, what is market failure first. It's an economic term that depicts a situation where in the market , the quantity of a product demanded by consumers does not equate to the quantity supplied by suppliers.

Types of market failure : 1) Public goods 2) Market Control 3) Externalities 4) Inadequate information

Government can focus on three points of market failure. First is Public good, second is Market control and the third is Externalities.

Government can use the Direct Provision Method for adressing the market failure of public goods. Government provides amenities like water distribution, electricity generation etc. Because government provide goods falling from market control.

The most important role of government is Regulation to address the market failure. The price of firm with significant market control might be regulated by the government in perception of private sector too. For examample the government can restrict the amount of pollution emissions from a particular production activity.

Taxes is the effective alternative tool of government which might be used to discourage undesirable activities. Taxes is the key tool to spread awareness of provision of information. Government subsidies,negative taxes can be used to address the market failure external benefits.

Thus, market failures can be corrected by the efficient government. There are three main economic questions what should we produce ? How should we produce it? and last one is For whom should we produce it?

government has a specific role in the economic system : it can be traditional, command, or market economy system. So government's role in the economy is to help correct market failure and providing public goods. Government can subsidise or provide goods with positive externalities. Universal Education provided by the government ensures that everyone can gain an opportunity to gain an education , which has a strong social benefit.

In this way government should focus on economic system to maximize the well being of citizens.