Policies to correct market failure
Correcting market failure
- Tools to push a market toward better resource use:
- indirect tax (on negative externalities), subsidy (for positive externalities),
- price controls, tradable permits (cap pollution), regulation (rules/bans),
- state provision (schools, hospitals), nationalisation / privatisation.
Practice
Tradable permits aim to:
A cap fixes total pollution; trading meets it at the lowest overall cost.
Competition policy & government failure
- Competition policy protects competition: blocking harmful mergers, banning price-fixing, fining firms that abuse monopoly power.
- Government failure — intervention that worsens resource use (poor information, high cost, time lags, unintended black markets).
Practice
Competition policy is used to:
Competition policy blocks harmful mergers, bans price-fixing and curbs abuse of monopoly power.
Practice
Government failure is when intervention leads to a worse use of resources than before.
Poor information, high costs, lags or unintended effects can make intervention backfire.
You've got it
Key idea
- tools: tax/subsidy, permits, regulation, state provision, nationalisation/privatisation
- competition policy blocks mergers, bans price-fixing, curbs monopoly power
- government failure = intervention that makes things worse