Market failure occurs due to market inability to do proper allocation of resources. Each government desires to have a resourceful market since it is the central pillar of the economy. Market failure leads to failure in the country economy which requires government intervention. The causes of market failure are so many, and that is why the government takes the responsibility to rectify. The government has a significant role to play in correcting market failures, and it has used much effort in stabilizing markets. With little or lack of competition, the market fails to be resourceful. When there is a high rate of mergers in the market where firms merge into one large company, and due to this, a monopoly power occurs in the market (Gordon, 2009). The paper aims at discussing the role that government plays in correcting market failure.
The monopoly power inhibits production since other producers have no opportunity of venturing into the market. The monopoly even makes the government compromise with it as it threatens the government of getting out of the market implying that market would collapse and such a market is unproductive. The government should use the value of stewardship to put regulations for curbing this problem (Gordon, 2009). The government can, for example, introduce a law to control prices. By doing this, the market will become resourceful as new competition is introduced in the market. For instance, in Britain, more telecommunication services were introduced which broke the market monopoly power that existed.
The government can also introduce a plan to relief taxes in the market to give businesses a period of paying no taxes, and this is in the case where immobility of resources leads to market failure. A healthy market requires free movement of labor, land, entrepreneurship, and capital but when market investors move to another market, the market remains with no stakeholders, and the rate of unemployment drastically increases. Introduction of tax relief by the government encourages firms to stay in the market and more to enter the market, and there is free movement of resources as well, e.g., the US textile industry tax relief.
In many instances, the government dominates the market where private companies are less than government corporations, and such a market is usually not resourceful since government corporations are often mismanaged, and many consumers reluctance towards such markets. This results in market stagnation hence not resourceful. The government can correct this failure by privatizing majority of its corporations and allow individuals to manage the corporations adequately (Gordon, 2009). The government can also allow private companies to carry public operations such as road construction, e.g., private businesses in Britain were given the right to manage prisons and construct roads by the government as a way of correcting market failure.
When consumers lack information about the products in the market, the market ceases to be resourceful. This kind of market failure can be corrected by the government passing rules and policies allowing all market stakeholders to brand products and to release product information in the market. This makes consumers aware of market products and can, therefore, evaluate the market, e.g., in US cigarette producers are allowed to label their products and their harmful effects. Due to this, consumers make informed decisions, and the market becomes resourceful and popular.
In conclusion, without government intervention, markets won’t be resourceful hence the government’s role is critical. The government role is mainly to correct market failures for the benefit of market stakeholders.
- Gordon, R. J. (2009). Macroeconomics. Boston, MA: Pearson Education.