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Rationale For Public Policy Intervention

Info: 1751 words (7 pages) Essay
Published: 16th May 2017 in Economics

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It is almost a truism that the principal rationale for public policy intervention lies in the inadequacies of market outcomes. Yet this rationale is really only a necessary, not a sufficient, condition for policy formulation, (Sidgwick 1901, Cairncross 1976). The “anatomy” of market failure provides only limited help in prescribing therapies for government success, (McKean, 1964).The first known use of the term by an economists was in 1958, but the concept has been traced back to the Victorian philosopher Henry Sidgwick, (Stephen G. Medema, 2007, Francis M. Bator, 1958). Non-market organizations are supposed to be an antidote for market failures but they fail themselves. Likewise, the government’s failure to intervene in a market failure that would result in a socially preferable mix of output is referred to as passive Government failure (Weimer and Vining, 2004). Government intervention in market failures normally renders markets vulnerable. This paper seeks to explain market failure and non-market failure, distinguishing market failure from non market failure and also discussing how the role of non-market failure may be used to argue against the government in trying to come between market failures.

Market Failure

It exists whenever a free market allocation of goods and services is not the best one from a social point of view. In a free market allocation system, if we consider the car market and assume demand and supply of cars match, meaning the car market is in equilibrium. This shows free market allocation has worked, but it can also be said that, it has not be desirable in the social point of view because cars cause congestion, pollution, accident and a lot of noise. This can be called market failure. In the health market, if it is assumed that the demand and supply for health has met, it means equilibrium and free market allocation has worked. That allocation is not always desirable from the social point of view. If there is a presence of market failure, allocative efficiency is attained when MSB is equal to MSC, where MSC is the Marginal Social Cost and MSB is the Marginal Social Benefit derived from a good or service. If healthcare cannot be accessed by half of a population in a country, it means the market has failed. Free market allocation suggests that consumers weigh their marginal cost and marginal benefits and make a good decision to purchase where they match. An example is, what an individual gains from buying a new car and whether if it is worth that price. In the same way, a producer weighs up his marginal cost and marginal benefits and makes a decision to produce where they match, that is where they make profit. An example is what the producer gains in producing a new Volvo, if it is worth the additional cost. When the market mechanism fails to deliver the best level of output for the society then non-market forces have to step in. If these non-market forces also fail then we have non-market failures.

Examples of market failures


An externality, or transaction spill over, is a cost or benefit that is not transmitted through prices (Hanming Fang, Duke University),and is incurred by a party who was not involved as either a buyer or seller of the goods or services causing the cost or benefit (Bishop Mattthew 2012). They occur when an individual externally incur a gain or cost during economic activities but are not considered by buyers and sellers involved because external cost and benefit affect third parties and not them. When a customer wishes to buy or sell a product, he only considers his private benefits whiles he does not consider external cost and benefits. By ignoring external cost and benefits he leads others through the market mechanism to the wrong level of output in the market. The tobacco and alcohol industry are example of markets that create negative externalities. These industries create negative externalities because they create external cost and get overproduction in their markets. Non-market forces have to step in to try to remove or reduce these externalities.

Price Mechanism

If the price mechanism was to handle certain markets, some particular goods will never be produced because everyone will be waiting for someone else to buy and supply the product. An example is the light got from light houses, firework display or traffic light. These goods are public goods and possess non-rivalry and non-excludability available for the other. This creates a problem where everyone will want to use the product but will wait until someone else has paid for it so as to use it freely. Consequently, if no one buys the product, the market will be missing from the economy if we left it to market forces. Again non-market forces have to correct this situation.

Non-market failures

This is the public sector analogy to market failure and occurs when a government intervention causes a more inefficient allocation of goods and resources than would occur without that intervention, (Weimer and Vining, 2004). Although “government” is the principal “non-market” organisation, there are also others: universities, churches, PTA’s, etc. (Bacon and Eltis 1976). Just as market failures do not give total confidence in market systems, government stepping in does not also ensure total satisfaction. Non-market failures do no rise from public sector not doing their work well but do arise from the problems that prevent public sector from solving these problems. Sometimes falling on the government to ensure social optimality may get things worse than they were originally.

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Non market organisations attain their principal source of income from donations, funds, loans and other non-priced avenues. On the other hand market organisations acquire most of their revenues from prices charged on output sold in the markets where the choice of where, what and whether to purchase is in the hands of the buyer. This is the most significant difference between market and non-market organisations.

The Government

If the market mechanism is left alone to check the effective and efficient allocation of resources they may fail, so the government has to intervene. The government has several roles it has to perform to try and eliminate market failures. It has regulatory, allocative, distributive and stabilizing roles.

The government has a role in putting in place laws and rules to make the market system function efficiently and effectively. Examples of these laws in UK are Consumer Insurance Act, Fair trade Act and Finance Act.

The government also has a role of determining where and how resources are to be allocated effectively to various sectors of the economy. Free goods like roads and to some extent education and health should be allocated efficiently.

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In the distribution of goods of services in the free market system, equal distribution is unlikely, so the government has to help in ensuring that individuals and firms have sufficient income and capital respectively. The government normally does this through state housing, benefits e.t.c.

In times of financial crisis and inflation, the government will have to come in to ensure steady growth. With the help of monetary and fiscal policies, the government is able to use tools like subsides, tax policies and other policies to stabilize prices and the economy.

Government failures

The term ‘government failure’ appeared first in the seminal paper of Charles Wolf. Governments might be subject to failures as much as markets are (Wolf 1979, LeGrand 1991).

Examples of government failures

Self-Centeredness and Politics

A way of government failure is that, politicians normally do not act in public interest. They are normally driven by their own interest and political ambitions. It is a worry in Africa and most part of the world, because they promote themselves with the motive of getting re-elected. In order to win power they indulge in things of no good policy but make good politics.

Information One basic government failure is the inability to process information. It is very difficult for the market to acquire correct and accurate information from the government. This is because there are a lot of inefficiencies and bias in the activities of most politicians especially in Africa. It makes it difficult for acquisition of information when people need to try and intervene to make the market better.

Poverty If an individual has no money or specifically has barriers to everyday life, he can be said to be poor. Markets are a link to poverty themselves because if there were no markets everyone would keep hold of what he has. Governments, in most cases interfere in markets when people are trying to lift themselves out of poverty. Government poverty programs in general fail to create incentives and opportunities that people can take advantage of.


The sources of market failures always provide attempted non market (eg. government), solutions. These solutions by government may fail themselves for reasons that can’t be specified as the same as market failures. Government policies in general may be short sited and always reflect the interest of an essential party to society. Government trying to intervene can also stop private sector initiatives. It is now a matter of individuals to know what is right and what is wrong. Individuals put so many constraints around markets that they are not allowed to really function as efficiently as they could. Instead of seeing a problem and saying government is going to do this, people should rather sometimes rely on their ability to solve things among themselves. Assuming a solution can be imposed before the problem emerges. If individuals are to think they have a mandate or always think positively, many problems we face today would be figured out. Markets wouldn’t be relying so much on the government. The preparedness and positive reasoning of individuals will be a supportive tool for market and non-market failure to help achieve economic development.


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