Government intervention may be necessary to correct market failures from "summary" of Public Finance by Harvey S. Rosen
When markets fail to allocate resources efficiently, it can result in a variety of problems such as monopolies, externalities, and public goods. In these situations, government intervention may be necessary to correct these market failures. One common market failure is the presence of monopolies, where one firm has the power to control prices and output in a particular market. This can lead to higher prices for consumers and lower levels of production than would be efficient. In such cases, the government may need to regulate the market or break up the monopoly to promote competition and ensure efficiency. Externalities are another type of market failure that occurs when the actions of one party impose costs or benefits on others who are not involved in the transaction. For example, pollution from a factory imposes costs on society as a whole in the form of health problems and environmental damage. In these cases, the government may need to intervene by imposing taxes or regulations to internalize the external costs and promote efficiency. Public goods are goods that are non-excludable and non-rivalrous, meaning that once they are provided, everyone can benefit from them and one person's consumption does not diminish the amount available to others. Markets often fail to provide public goods efficiently because individuals have an incentive to free-ride and not contribute to their provision. In these cases, the government may need to step in and provide public goods such as national defense or public parks to ensure that they are provided at the optimal level.- Government intervention may be necessary to correct market failures such as monopolies, externalities, and public goods. By regulating markets, internalizing external costs, and providing public goods, the government can help promote efficiency and ensure that resources are allocated in a socially optimal manner.
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