MARKET FAILUREMarkets work well when there is competition and proper incentives
When markets fail, government may need to intervene
LACK OF COMPETITION
Large firms may be more efficient
e.g., Electric power
Large firms may be able to exclude or weaken competitors
e.g. Microsoft
Lack of competition can cause high prices and other problems
Government remedies
Antitrust Laws
Price regulation
PUBLIC GOODS
Sometimes, people receive benefits without paying
e.g., A national defense
system protects everyone
Thus, there is no incentive
to pay for national defense
Public Goods: People can’t be excluded from the benefits
Public goods are not well-provided by markets
Government could intervene and use its taxing powers
SPILLOVERS
Some activities impose costs on other than the buyer
e.g. Pollution
Polluters don’t have to consider the costs they impose on others
Markets don’t provide an incentive to avoid polluting
Government needs to intervene
Environmental regulations
Pollution taxes