Question

This question is about macroeconomic.

Indicate different ways in which government has attempted to correct each of the following market failures.

-Lack of competition

-External Costs

-External benefit

-Lack of public goods and services

Answer 1

Solution

a.Lack of competition - Govt. will try to spur competition in the sector.For example say the market is presently monopolistic(or) duopolistic in nature.In order to increase the competition,the govt. can adopt to different measures like announcing new incentives (in the form of subsidies and / or tax holidays,etc.,) so that new players enter into the industry which will lead to increased competition in the sector.The govt. can also liberalise the sector (if required) to attract more players. Ex: India opened it's insurance sector to private players in the late 90's.

b.External Costs - The Govt. can impose / raise taxes on those goods / industries that are causing external costs.

Ex: Some states in India have recently started imposing " Green Tax" on single-plastic users in order to curb it's usage.

Govt. increasing the excise tax on harmful items like cigarettes and other tobacco products as they are having high external costs on the society (rise in diseases leading to rise in healthcare costs)

c.External benefits - Govt. can opt for providing subsidies for encouraging the industries / sector that have external benefits.

Ex: The India Govt. in order to improve the quality of air has come out with a special incentive based program call FAME which promotes the adoption of electric vehicles usage.Incentives are provided to all the stakeholder - Consumers and manufacturers.

d. Lack of public goods and services

Since in many developing and underdeveloped countries,the federal govt's are not in a position to spend to create the sufficient amount of public goods and services

So govt. can pass some regulations as below (or) actively seek for donations / voluntary contributions from the private institutions and it's citizens.

Ex: Govt can come out with a policy mandating the corporates to spend 10% of their average three-year profit towards their CSR activities.The govt. decide the manner of allocation of those funds towards the public goods like community parks,tree plantation,sanitation infrastructure etc.,

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