One of the justifications for government programs is market failure. Carefully define market failure and the range of ways it is discussed in the literature. Discuss at least three specific examples of policies or programs justified using the market failure concept and discuss arguments for and against the existence of market failure in each example. What other justifications might be given for these government policies? Provide examples of these. Even if there is agreement that market failure exists, does that mean the government should address the market failure? Discuss.
A:
Market failure occurs when freely-functioning markets, operating without government intervention, fail to deliver an efficient or optimal allocation of resources. Therefore, economic and social welfare may not be maximized as a result loss of economic efficiency. In other words, when markets do not provide us with the best outcome in terms of efficiency and fairness, then we say that there exists that there exists market failure.
Market failure exists when the competitive outcome of markets is not satisfactory from the point of view of society. This is usually because the benefits that the free-market confers on individuals or businesses carrying out an activity diverge from the benefits to society as a whole.
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From the above diagram we can see that the root causes of market failures in an economy. They have been described below:
1. Public and Merit Goods (Missing Markets): Merit goods create a divergence between the private and social costs and benefits of production and consumption leading to the risk of market failure. Merit goods are those goods and services that the government feels that people will under-consume, and which ought to be subsidized or perhaps provided free at the point of use so that consumption does not depend primarily on the ability to pay for the good or service. For example: providing education to the mass people or schooling it is a sort of...