Answer the following questions in about 150 words each : (d) What are the major reasons for market failure ? Explain the role of the government in this context.

Major Reasons for Market Failure

Market failures arise from several imperfections in the market structure and mechanisms:

• Externalities: These are costs or benefits imposed on a third party not directly involved in the production or consumption of a good or service.
  • Negative Externalities: e.g., pollution from a factory imposing health costs on nearby residents.
  • Positive Externalities: e.g., vaccination providing herd immunity benefiting the wider community.
• Public Goods: Goods that are non-rivalrous (one person's consumption does not diminish another's) and non-excludable (it's difficult to prevent non-payers from consuming them). This leads to the "free-rider" problem, where the private sector has little incentive to provide them.
  • e.g., National defense, street lighting.
• Asymmetric Information: Occurs when one party in a transaction has more or better information than the other, leading to inefficient decisions.
  • e.g., A seller of a used car knowing more about its defects than the buyer (adverse selection).
• Market Power (Monopolies/Oligopolies): A single firm or a few firms dominating a market can restrict output, raise prices above competitive levels, and reduce consumer welfare.
  • e.g., A sole electricity provider charging excessive prices.
• Incomplete Markets: Markets fail to provide certain goods or services even when the cost of providing them is less than what individuals are willing to pay.
  • e.g., Lack of affordable insurance for certain high-risk events.

Role of the Government in Correcting Market Failure

Governments intervene to internalize externalities, provide public goods, regulate markets, and ensure equitable outcomes. Key roles include:

• Taxation and Subsidies:
  • Taxes: Imposed on goods/activities with negative externalities (e.g., carbon taxes, "sin taxes" on tobacco) to internalize social costs and discourage consumption.
  • Subsidies: Provided for goods/activities with positive externalities (e.g., education, renewable energy) to encourage production and consumption.
• Direct Provision of Public and Merit Goods: Governments directly supply public goods (e.g., national defense, infrastructure like roads) and merit goods (e.g., healthcare, education) that would be underprovided by the market.
• Legislation and Regulation: Enacting laws to control market behavior, such as environmental protection laws (e.g., pollution standards), consumer protection laws (e.g., product safety), and labor laws.
• Antitrust Laws and Competition Policy: Implementing and enforcing laws (e.g., India's Competition Act, 2002) to prevent monopolies, control anti-competitive practices, and promote fair competition.
• Information Provision: Mandating disclosure of information (e.g., food labeling, financial product transparency) to reduce information asymmetry and empower consumers.