Question

26. What are modern “market failures” that might be associated with each of the following: national defense, education, and establishing “standards” (official quality standards) and enforcing laws against fraud.

Answer 1

Market failures refer to situations when invisible hand of Adam Smith cannot provide goods and services optimally. In case of national defense it is in no private individual's interest to invest in national defense because of huge cost. Therefore the market fails because private individuals would not invest in it and thus country is weak defensively. Again in case of education it is optimal for firms to hire workers but they are unlikely to spend money for their education because of cost. Therefore it would leave uneducated people and hence government is required for providing these services. Again the private companies would not establish standards as it is difficult to go through the processes of complying with the standards. Thus there would be no standards in absence of government leaving us with low quality products. Finally laws against fraud will not be provided by market because fraud actually provides vent for the private individuals to make profit. Thus there would be pervasive corruption in absence of government.