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What are two examples of government functions that help correct a market failure?
Sample Answer
Government Functions Addressing Market Failures
Market failures occur when the allocation of goods and services by a free market is not efficient, leading to negative outcomes for society. Government intervention is often necessary to correct these failures and ensure a more equitable and efficient distribution of resources. Here are two examples of government functions that effectively address market failures:
1. Regulation of Externalities
Explanation
Externalities are costs or benefits incurred by third parties who do not participate in the economic transaction. When externalities are present, the market fails to allocate resources efficiently. For instance, pollution from a factory is a negative externality that imposes costs on nearby residents and the environment, which are not reflected in the market price of the factory’s products.
Government Function: To correct this market failure, governments can impose regulations or taxes on companies that produce negative externalities. For example, the government may implement emissions standards that limit the amount of pollution a factory can produce. Additionally, a carbon tax can be levied on companies based on their carbon emissions, incentivizing them to reduce pollution and invest in cleaner technologies.
By regulating externalities, the government can help align private costs with social costs, thereby promoting more efficient resource allocation and protecting public health and the environment.
2. Provision of Public Goods
Explanation
Public goods are characterized by non-excludability and non-rivalry, meaning that they are available to all individuals without reducing their availability to others. However, because individuals cannot be excluded from using public goods, there is little incentive for private markets to produce them, leading to underproduction or complete omission.
Government Function: The government steps in to provide public goods such as national defense, public parks, and street lighting. For instance, national defense protects all citizens regardless of their individual contributions to its funding. If left to the private sector, national defense would likely be underfunded as individuals may choose to free-ride on the protection provided by others.
By directly providing public goods or funding them through taxation, the government ensures that essential services are available to everyone, addressing the market failure associated with their underproduction.
Conclusion
In summary, government intervention is crucial in correcting market failures through various functions. By regulating externalities, governments can mitigate negative impacts on society and the environment, ensuring that private costs reflect social costs. Additionally, by providing public goods, governments can guarantee access to essential services that would otherwise be underproduced in a free market. These functions highlight the importance of government in fostering a more efficient and equitable economic landscape.
