Policies and Strategies for Market Failure

Policies and Strategies for Market Failure1.0 IntroductionMarket hardship refers to a situation whereby a bigheartedly-functioning commercialize fails to allocate resources efficiently or optimally resulting in undesirable outcomes. Main examples of commercialise disasters include market situation, out-of-doorities, anisometric distribution of economic prosperity and inadequate state-supported ethicals.Market designer occurs when economic actors argon able to exert considerable influence on market prices or the quantity of goods exchange causing concentration of origin and imperfect competition. Externalities argon the uncompensated impact ca utilise when the market disregard international costs of an economic activity on the well-being of a bystander. Externalities variegate social costs of benefit from the private optimum, leading to market failure as well. Unequal distribution of economic prosperity occurs as tribe ar rewarded according to their ability in genera ting high income by producing things others argon go outing to pay off. Markets fail as signifi screwt differences in income and wealth leads to a wide gap in living standards between assorted groups in the preservation. Market in like manner fails when there atomic number 18 inadequate prevalent goods which are not provided by the market mainly because of the free rider issue1.Hence public policies are required to condemn market failure and increase the efficiency and growthivity of the market. This ensures that the market is able to give the highest descend social welfare, thus allowing a greater distribution of income and wealth and high standard of living.2.0 Public PoliciesPublic policies are basically described as attempts taken by the government as an approach towards public issues and are commonly incorporated in legislations, economys, decisions and actions (Venus 2010). Examples of public policies that scum bag be taken to remedy market failure are legislat ions and regulations, implementation of taxes, subsidies and price controls.2.1 ordinances and RegulationsLegislation is a law which has been enacted by a governing body whereas regulation is a rule or restriction promulgated to control activities of businesses and consumers. in that location are two forms of regulations, namely industry regulation which pr neverthelessts firms from gaining and exploiting excessive market control and social regulation which protects consumers from social costs like externalities, socially undesirable goods and asymmetric information. Examples include price regulations or orders prohibiting collusive practices and noncompetitive behaviours which help reduce concentration of market power. Legislations regarding the protection of the environment stomach also be holdd to reduce externalities like pollution.Legislations and regulation are also an example of command-and-control policies which are specifically targeted at reducing externalities. Comm and-and-control policies correct externalities by regulating behaviours directly, making them either required or forbidden. This is commonly carried out by respective environmental agencies or commissions of a country, for voice the Environmental Protection Agency in United States which restrict levels of pollution and emissions emitted by factories and industries.2.2 TaxesTaxes are a fiscal charge or bill obligate upon an individual or entity. Taxes cease be used to beat the market, spread income and reduce externalities through the manipulation of the demand and supply curves in the market. Even so, the tax imposed must be equal to the external cost or benefit to achieve the optimal quantity of output.A form of tax is environment levy which is imposed on firms to brighten them pay for the negative externalities they pissd. Taxes can also be imposed on undesirable goods to increase their price and reduce the quantity demanded or even used to compel people to pay for public goods to overcome the free rider issue. Similarly, taxes imposed in accordance with income earned helps reduce the market failure of income differentials. At the same time, taxes also helps increase governments revenue which can be spent on alternatives such as direct supplying of public goods and services to compensate for the lack of collective goods.Tax is also part of market-based policies, developed specifically to reduce externalities. Market-based policies internalize externalities by providing incentives so that private decision makers testament solve the externalities themselves. An example corrective taxes used to persuade private firms to take account of social costs that cram from negative externalities.Effect of tax on the market can be seen in Diag. 1. Tax imposed on a product would increase its price, effecting both consumers and kick upstairsrs. As production cost increases, the supply curve will shift to the left from S to S1 as producers would falling off the products supply. Since the price of the good is now more expensive, the quantity demanded by consumers would also decrease as seen in the change from Q2 to Q1. However, should the demand of the good be inelastic, taxes would fail to create any(prenominal) significant reduction in the demand of the good as shown in the diagram. For example, cigarettes.2.3 SubsidiesSubsidies, also known as negative tax, are financial pay heedance provided to businesses or economic sectors. Subsidies are used to assist humble and potential firms by reducing their production cost so that they are able to compete against larger firms. They can also come in forms of loans or research and development grants to assist firms in their research to produce products of better quality. This reduces the barriers to entry and simultaneously increases competition among firms in the market alike effectively solving under consumption of resources, a dogmatic externality. Furthermore, subsidies can increase socia lly desirable goods and assist in the redistribution of income. Even so, the allowance imposed must be equal to the external cost or benefit to achieve the optimal quantity of output.Effect of subsidies on the market can be seen in Diag. 2. Subsidies imposed on a product would reduce its price, effecting both the consumer and producer. Production cost decrease as producers know assistance and the supply curve will shift to the right from S to S1 as producers would increase supply. Since the price of the good has now reduced, the quantity demanded by consumers would also decrease as seen in the change from Q to Q1.2.4 legal injury Controls wrong control is a form of public policy where the government uses its law-making power to regulate prices of goods or services. The government may attempt to fix and follow up exact prices of a particular good or service sold or set a ceiling price or underprice price (Johnson 2005). political science will then be able to assist consumers and producers with the impact it has on consumer demand and production of the good or service. toll ceiling is the legal maximum price which a good can be sold at but not any lour than that. An example would be rent control to help poor consumers which cannot drop housing. cost ceiling only takes effect when it is imposed below the equalizer price as shown in Graph A as producers are forced to meet the maximum price set. However, this may result in shortages (Graph A) as the lower price will increase demand for the product. equipment casualty floor is the legal minimal price that can be supercharged but transactions at higher prices are prohibited. An example is the minimum wage laws which increases workers standard of living. Price floor only takes effect when it is imposed above the equilibrium price as shown in Graph B as suppliers have to raise their prices to meet the governments minimum price. However, a scanty may occur (Graph B) as the higher price will decrease consumer s demand.3.0 ConclusionAs a conclusion, it can be seen that markets require public policies and government intervention in order to function effectively and achieve the objectives of producers, especially small and potential firms and consumers. Market failure can be redressed through enforcement of legislations and regulations, taxes and subsidies and price control which are able to increase competitiveness, redistribute income and reduce externalities and socially undesirable goods. Although the implementation of these policies are useful in reducing negative impacts on the economy and basically have positive implications, there are also drawbacks. For instance, legislations and regulations are difficult and expensive to enforce whereas subsidies requires a government to first have sufficient financial content which prevents all countries from carrying them out efficiently. Price control also results in tautological and shortages of products they are imposed on in the long run w hich will also lead to inefficient allocation of resources. Hence, governments should always analyze the economy carefully and critically and carry out policies accordingly to prevent any further deteriorating of the economy.4.0 ReferencesBooksMankiw, N. G. 2008, Essentials of Economics, 5th Edn, South West Cengage Learning, United StatesWebster, N. 2005, Economics, 2nd Edn, Greg Eather, AdelaideWebsitesJohnson, P. M. 2005, Price Controls A Glossary of Political Economy Terms, retrieved 16 March 2010, The Smartacus Corportion 2009, Government Intervention Price Ceiling, retrieved 17 March 2010, The Smartacus Corportion 2009, Government Intervention Price Floor, retrieved 17 March 2010, Venus, D. 2010, What is Public Policy, retrieved 16 March 2010, Watkins, T. n.d., Impact of an inscribe Tax on Subsidy on Price, retrieved 17 March 2010,