Is \"market failure\" a sign that the government needs to interceed? Some say \"

Question

Is "market failure" a sign that the government needs to interceed? Some say "Yes." They are sure that market failure is a sign of an unhealthy economy. Others believe that market failure is the sign of a healthy economy.

Each discussion should focus on a different example of market failure. Hints or suggestions to look at include the airline industry, Chrysler, or even the effect of the recent tsunami. Remember "8-track tape" players? That was a product success story that turned into a product failure. So, when I say "market failure" I'm talking about demand for 8-track players. Once it was high. Now it is low. For that matter, when I tell my kids they "sound like a broken record" they look at me and ask "What's a record?"

Explanation / Answer

Market failure takes place in the economy when firms exploit the market conditions and social benefits and costs are overlooked. Further, the free rider problem as well as payment made by one party for the errors made by another party, also constitutes the market failure. It shows that market failure leads to the unhealthy economy and it requires the government to intervene and take necessary action to eliminate the market failure and increase the efficiency of the market. So, it is very important and good for the economy that government intervenes. For example, if a firm produces goods by only considering the marginal private cost and creates pollution, then the higher volume of goods is demanded due to lower price as the price is only driven by marginal private cost. Since the pollution affects those who don’t buy anything from the fir, then it is a market failure due to negative externality. Now, the government intervenes and apply Pigovian tax upon the firms so that they now consider marginal private and social cost and price increases. It makes the market to operate at socially optimal equilibrium and market failure is eliminated.
Further, the market failure is different from the product failure that is associated with the 8-track tapes. The product of 8-track tape failed due to the poor product quality and flaw in design. Here, product failure does not lead to market failure, rather it is the disruptive innovation that made the technology of 8-track tape to be obsolete.

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