What Is Meant By Market Failure And How Can Government Attempt To Essay

What Is Meant By Market Failure And How Can Government Attempt To Correct It - Essay Example In economics, a market failure takes place when â€Å"the production or use of goods and services by the market is not efficient†. In other words, market failure occurs when free market fail to provide optimum allotment of resources, either over-allocating, or under-allocating their resources, which results in economic inefficiency In other words, market failure occurs when free market fail to provide optimum allotment of resources, either over-allocating, or under-allocating their resources, which results in economic inefficiency (Francis, n.d). In such a case, there exists another possible outcome where the market participants’ gains would compensate their losses. Market failure is a serious issue as in consequence it disrupts social and economic region of a particular region or even the whole country. Thus, it is a challenge for governments to interfere and ensure that there is no risk of market failure. There are several ways in which governments can correct the sta te of markets: by public section production, regulations and antitrust legislation, taxation and subsidies (Francis, n.d). This paper discusses different kinds of market failure and the ways in which government can attempt to correct them. There are several general categories of market failure: market power, externalities, public goods, and equity. Market power is the ability of a company to influence the market price of a good or service, raising prices above competitive levels (Francis, n.d, ICT regulation toolkit, n.d). A company with market power can raise prices without losing a significant portion of its business to other companies. The rise in the prices above competitive levels may affect negatively the market as it results in diminished customer demand, efficiency loses, and harm on the public interest. Furthermore, companies with significant market power may abuse their power, using their leading position to reduce competition. Some common forms of anticompetitive conduct involve abuse of dominance, cross-subsidization, and misuse of information (Market Power, n.d). There are several ways in which governments can deal with abuse of significant market power. To start with, all national regulatory authorities (NRA) have to make an assessment of the state of completion in specific markets and consider whether such competitive behavior harms another companies and customers (European Regulators Group, 2007). In such a case, the dominant company may be required to stop its abusive behavior or make specific changes to its policy so that it would not be damaging to competition anymore (Remedies for Abuse of Dominance, n.d). This remedy requires the authorities to monitor the company continuously to guarantee that the behavioral change is maintained. Another possible solution is fining the company or its employers with direct responsibility for anticompetitive behavior. The firm can also be ordered to pay compensation to its customers and competitors who have been harmed by their policies. The European Regulators Group (2007) proposes functional separation in markets where non-discrimination procedures were ineffective in dealing with problems of abusive market power. Functional separation may involve breaking the company into two different firms with separate market shares, or separating competitive and monopoly products and services of the company. This solution may also include such elements as separation of operational support systems, brands, employees, and information management systems among new, individual business units. When deciding on the degree of the separation proposed, the NRA’s have to take into account the cost and benefits of this solution and base their decision on completed market reviews (The European Regulators Group, 2007). Cross-subsidization occurs when companies with market power charge a high price for their non-competitive products services and use different proceeds to subsidize low prices for compet itive goods. In such a case, governments can implement and enforce a price floor for the low-cost products in order to ensure that the revenue that is generated by the product