Market Failures and Government Intervention in the Economy
State Intervention and the Provision of Public Goods
State intervention assumes the provision of a range of goods that society understands should be enjoyed by everyone. The supply of public goods and services is specified in several ways: through own production, acquired from private companies after their free distribution among the population, or partially subsidizing their purchase.
Externalities
For example, the cost of regenerating a forest felled by the timber industry generates negative externalities or costs incurred without compensation by persons outside the consequence of this activity.
An external cost is the cost of an economic activity that is borne by people other than those engaged in the activity in question. An external benefit is the benefit of an economic activity received by persons other than those performing the activity in question. Externalities are consequences of an economic activity that affect people other than those performing the activity in question and are not reflected in the prices of goods and services produced.
Public Sector Intervention: Environmental Policies
A government can utilize several instruments to reduce pollution:
- Obtaining information about the type of contamination
- Identifying and classifying agents that cause it
- Measuring the impact of pollution on the environment and people
- Introducing thresholds to determine the maximum contamination that a company is authorized to cause, so those that exceed those limits will be sanctioned
- Tax unit fixation: the more contamination, the more is paid in taxes
- Pollution licensing: establishments need a license in order to contaminate
Market Failures
A market failure is a negative consequence of market performance and occurs when the market is not efficient in the allocation of resources. The main market failures are:
- The instability of economic cycles
- The existence of externalities
- Public goods
- Imperfect competition
- The unequal distribution of income
The Volatility of Economic Cycles
These are fluctuations in economic activity in alternating phases of expansion and recession. Cyclical instability is the most important market failure because it directly affects the number and characteristics of jobs in a country. The development of economic activity influences wages during periods of recession. The public sector can adopt one of two positions:
- Not to intervene, trusting that the market will move out of the crisis by itself and economic activity will re-expand.
- To intervene, consuming or producing goods and services, the state artificially increases economic activity levels to compensate for the lack of demand.
The Existence of Public Goods
Situations exist where the market is not able to respond to specific demands, such as those of a social type. These types of goods, which are not profitable for a particular investor but are profitable for the country, are called non-excludable goods. They are characterized because it is practically impossible to prevent people who have not paid for them from using them. Although some of the demand for terrestrial communications is covered by private enterprise through toll roads, the quantity supplied of such goods is insufficient in relation to demand.