Government intervention is sometimes necessary from "summary" of Economics of the Environment by Robert N. Stavins
Government intervention is sometimes necessary in situations where market failures prevent the efficient allocation of resources. Market failures can occur due to externalities, public goods, common-pool resources, and imperfect competition. Externalities, such as pollution, occur when the actions of individuals or firms affect third parties who are not compensated or penalized for the effects. Public goods, like clean air and national defense, are non-excludable and non-rivalrous, meaning individuals cannot be excluded from consuming them, and one person's consumption does not diminish another's. Common-pool resources, such as fisheries and forests, are rivalrous but non-excludable, leading to overuse and depletion. Imperfect competition arises when firms have market power to set prices above marginal cost, leading to deadweight loss and inefficiency.
In these cases, government intervention can help correct market failures and promote efficiency. For example, the government can impose taxes or subsidies to internalize externalities, ensuring that the full social costs or benefits of production are reflected in market prices. It can also provide public goods directly or regulate their provision to ensure their optimal allocation.
Additionally, the government can implement regulations or tradable permits to manage common-pool resources sustainably and prevent overuse. In the case of imperfect competition, antitrust laws and regulations can promote competition and prevent monopolies from exploiting consumers.
While government intervention is necessary in certain situations, it is essential to consider the potential drawbacks and limitations. Government failure, such as regulatory capture, rent-seeking, and bureaucratic inefficiency, can sometimes exacerbate market failures rather than correct them. Therefore, policymakers must carefully design and implement interventions to minimize these risks and maximize the benefits of government action.
