Policies to overcome market failure

To overcome market failure, the government can use various policies. For example, to reduce consumption of demerit goods, they can increase taxes.

Policies to overcome market failure

1. Taxes on negative externalities
2. Subsidies on positive externalities
3. Laws and Regulations
4. Electronic Road Pricing – a specific tax related to congestion
5. Pollution Permits – giving firms the ability to trade pollution permits.
6. Advertising: Government campaigns to change people’s preferences.
7. Nudges – use of behavioural economics
8. Government price controls – Max and min prices Buffer stock schemes – Government price control to try to stabilise prices.
9. Changes in Property Rights – Coase theorem
10. Policies to overcome poverty/inequality – inequality can be seen as type of market failure
11. Policies to reduce unemployment – policies to overcome market failures, such as geographical and occupational immobilities.
12. Labour market regulation – Minimum wages to deal with monopsony power

Tax

A tax shifts supply to the left and raises the price of the good.

Types of taxes to overcome market failure

• Airline tax
• Carbon Tax
• Cigarette Tax
• Death Tax
• Fat Tax
• Income tax
• Petrol tax
• Plastic bag
• Poll Tax
• Rubbish tax
• Tobin Tax

Subsidies

Subsidy shifts supply to the right and moves the equilibrium closer to where SMB = SMC.

• Farming subsidies – is there a case for extra subsidies for farmers?
• Subsidies for positive externalities

Government price controls

• Maximum prices
• Minimum prices
• Buffer stocks

Labour market regulations

• Minimum wages
• Max working week
• Trade unions
• Discrimination legislation

Related

• Government failure – when government efforts to reduce market failure lead to an inefficient outcome.