The Role of Government in Correcting Market Failures

In a market failure, the amount of products requested by purchasers does not compare to the amount that is provided by the providers in the market thus leading to a net social welfare loss. Individual economic participants make decisions which are correct on an individual basis but might be wrong for the group participants which leads to the inequality in the quantity demanded and quantity supplied (Winston, 2006). In this essay, I will provide an evaluation of market failures and the role that government should play to correct such failures as well as the effectiveness of the actions taken by the government to correct market failures. To be able to understand the role of government in correcting market failures, it’s important to understand the involvement of the government in the economy.

To begin with, the government makes efforts to react to a market failure to by and large allocate resources productively. Contrary to the taxation intervention, the government can also use subsidies to increase supply and thus reducing the price aimed at encouraging the production or consumption of goods which have positive externalities. Taxes and subsidies greatly help in bridging the gap between social and private costs and benefits thus helping to correct market failures. An example of how government can use subsidies to correct market failures is evident in 2008 where as farm prices increased, the U. S. Congress passed a farm bill that raised the subsidy payment to $40 billion (Mankiw, 2018). Taxation and imposing subsidies to either support or hinder the production or consumption of specific goods and services actually help in correcting market failures.