Question

Q4. The Government has various tools available to deal with the Market Failure. List at least major 8 tools and substantiate your answers?

Answer 1

Market Failure

Market Failure occurs when the price mechanism fails to account for all the costs and benefits necessary to provide and consume a good.

During Market Failure the Government usually responds to varying degrees. Possible government responses inclue;

1. Legislation: Enacting specific laws, for example banning smoking in restaurents, or making high school attendence mandatory.
2. Direct provision of merit & public Goods: Governments control the supply of goods that have positive externalities.For exmaple, by supplying high amount of education, parks or libraries.
3. Taxation: Placing taxes on certain goods to discourage use and internalize external costs.For example, placing a 'sin-tax' on tobaco products, and subsequently increasing the cost of tobaco consumption.
4. Subsidies: Reducing the price of a good based on the public benefit that is gained. For example, lowering college tuition because society benefit from more educated workers.Subsidies are most appropriate to encourage behaviour that has positive externalities.
5. Tradable Permits: Permit that allow firms to produce a certain amount of something, commonly pollution. Firms can trade permits with other firms to increase or decrease what they can produce.This is the basis behing cap-and-trade, an attempt to reduce pollution.
6. Extension of Propert Rights: Creates privatization for certain non-private goods like lakes,rivers nad beaches to create a market for pollution. Then. individuals get fined for polluting certain areas.
7. Advertising: Encourages or discourages consumption.
8. Inernational Cooperation among Governments: Governments work together on issues that affect the future of the environment.