Managerial Economics 8 Tools to Deals With Market Failure

Question:-

The Government has various tools available to deal with the Market Failure. List at least major 8 tools and substantiate your answers?

Answer:-

Market failure occurs when all costs and benefits expected for the provision and sale of a good are not taken into account by the price mechanism. By not delivering the socially desirable amount of the nice, the economy would fail. Before the market failure, supply and demand do not create amounts of goods in the market where the price represents a low consumer benefit. The disparity allows the over- or under-consumption of the products to be allocating inefficiency. Business system structure leads to the failure of the business. The inefficient producers, externalities and environmental problems, and the lack of public goods are not fine in the real world. An externality affects a third party that allows a good or service to be created or consumed. The inefficiency of market allocation of goods and services induces market failure. A market system does not take all the costs and advantages of supplying or using a particular product into consideration. The supply of the socially optimal good will not come about on the market – it will be generated either over or under. It is necessary to acknowledge the reasons for market failure in order to understand market failure fully. It is unlikely for them to be perfect because of the structure of the markets. Consequently, the majority of economies does not thrive and need forms of intervention (Sahuraja, 2019).

The government typically reacts to various degrees during market failures. Possible responses from the government include:

Legislation: Relevant laws are passed. For example, prohibit smoking in restaurants or make compulsory secondary school attendance.

Direct provision of merit and public goods: Governments regulate goods supply with positive externalities, by providing high levels of instruction, parks or libraries, for example.

Taxation: Taxation of such goods to prevent the use of external costs and internalise them. For example, the ‘sin tax’ is added to cigarette, and the cost of tobacco consumption is consequently increased.

Subsides: Reduction of a reasonable price based on the benefits received by the public. For instance, the reduction of tuition at school, since society benefits from more skilled employees. Subventions are best to promote constructive external behaviour.

Tradable permits: Requires companies to generate any quantity, normally emissions. Companies may exchange permits to increase or minimise what can be produced with other companies. This is the basis for a reduction in emissions, which is cap-and-trade (Kaushik, 2016).

Extension of property right: It creates privatisation to create a market for waste for some non-private products, such as lakes, rivers and beaches. Then people are fined because they pollute certain areas.

Advertising: Promoting or discouraging consumption.

International corporation among government: Governments cooperate on topics that impact the environment’s future.