MARKET FAILURE AND GOVERNMENT INTERVENTION This essay will examine the concept of market failure and the measures that governments take remedy the failure of the market. The concept of perfect market allocation of resources was in W. Baumol's (1988,631), view largly theroretical. Baumol believed that economic models relied upon the concept of the invisible hand first discussed by Adam Smith. In these models, the perfectly competetive economy was able to allocate resources efficiently, without the need for market intervention by outside agents, including governments. However, there were significant weaknesses in these models particuarly in the area of ensuring equity of acess, social objectives and in the provision of public goods.
Ensuring equity of acess, meeting social objectives and providing public goods.were considered the main reasons why the public sector provided goods. Why governments intervened in the market was due mainly to charactoristics of the market place. If the market place was to function efficiently, several conditions needed to exsist, including,
* Freedom of choice
* Certainty of demand
* Miniminal externalities
In addition to these prerequisites, the perfect market required perfect consumer and supplier information, no rent seeking behaviour and no moral hazard existed. If these conditions were not met, market mechanisms would fail to produce the efficient allocation of resources.
P. Groenewegen (1990,2) argued that governments intervened in the market place with the,
... Public sector... being engaged in the providing sevices (and in some cases goods) whose scope and variety are determined not by the direct wishes of the consumers, but by the the decisions of government bodies.
This view implies that governments intervene for many reasons, including the redistributional and stablisation functions. While market failure is one reason for intervention, ot...