Market Failures: Government Intervention

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Dan Mattera

September 27, 2010

BUS 345 Essay #1

What is the basis for the contention that governments should intervene to correct market failures? (Be sure to explain what market failures are and why they are significant without providing superficial, rote definitions.) Contrast this with the argument that laissez faire is preferable to intervention. (If possible, link this to the idea of government failure, the iron law of public policy, rent seeking, and unintended consequences.)

Imagine a grading rubric in which failure is considered everything except perfection. In the academic world this seems absurd but in economics whenever markets deviate from any of the ideal conditions necessary for perfect competition the result is measured as a failure. Although the term “market failure” seems to suggest some sort of catastrophic collapse such as the recent recession, it actually entails any occasion wherein some net social cost is incurred including such everyday inefficiencies as harmful externalities or the price mechanism departing from a state of equilibrium (Goldsmith 23-25).

The unpredictable and complex nature of the market has left economists and politicians with a plethora of issues, generating incredible contention over how to mend each of the market’s failures. Those on one end of the ideological scale will usually argue that most market failures are not self-correcting and that some sort of government intervention is necessary. Generally, their underlying assumption is that intervention is needed to counteract the combined factors of human greed and today’s concentrated distribution of wealth which has created a system so unbalanced that the market cannot always control itself and could instead be driven by those with enough money and power.

Those poised to capitalize on such a market are the corporations that account for the vast majority of economic power in this country and, according to most advocates of government...
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