explain market failures?

Question

this is from macroeconomics
1 How people respond to incentives.
2 How government sometimes can improve market outcomes.

Answer 1

First off, market failure has more to do with MICROeconomics...

To understand market failure, you need to remember that it usually comes in one of three flavors.

1. Public goods. Some goods (for example, radio broadcasts) can be provided either to everyone or no one. The transmitter is either on (and then anyone with a receiver can listen to a broadcast) or off (and then there's nothing to listen to). The problem with public goods is free-riding; if people can consume them for free, they probably will. Private sector usually responds to the public good dilemma by producing it in advertising-supported mode (the cost of production is paid by advertisers, rather than end users). Government may respond to it by providing the good directly (i.e., production is done by government employees) and financing its production out of tax revenues.

2. Uncertainty of property rights. When something seems not to belong to anyone (i.e., when property rights are uncertain or are not enforced), people are inclined to take advantage of it. One example of such behavior is poaching in international waters. Governments respond to this problem by setting fishing quotas through multilateral agreements and enforcing those quotas.

3. Insufficient information. When there is not enough information about a product (or the information is only available in highly technical presentation), consumers are unable to judge the value of the product. In the extreme cases, a product may be even dangerous to some users (say, cookies containing peanut butter are dangerous to people with allergies). Absent objective information, consumers make purchasing decisions based on price and brand. Governments sometimes respond to this problem by requiring that certain information be disclosed in a particular way. Examples range from nutritional value disclosures on food products to presenting performance of mutual funds.

Answer 2

Not enough information in the question.

People don't always respond as would necessarily be predicted but I don't see that as a failure.

I'm not aware of any case where government has improved an outcome over a free market solution. I can think of many examples where government changed the market outcome but never improved it.

Tariff on sugar was in place to protect domestic producers but it forced candy producers to move outside the country and the net effect was negative. Even though the domestic sugar producers benefitted. Is that an "improvement"?

EPA regulations on gasoline formulation force refiners to produce multiple blends for various regions during the summer months. This drives up the cost of gasoline during the biggest driving months. Is that an "improvement"?

Regulations on health care, plus government provided health care have driven up the cost of health care. Is that an "improvement"?

Minimum wage laws make it harder to get an entry level job. Forcing the unskilled and inexperienced out of the job market. Is that an "improvement"?

Answer 3

there are many chapters on this written in economic theory, i think you are probably better off consoulting your text book.

but to give a simple answer,
1.it depends on the incentive and what it is trying to accomplish. What can be said in general about all incentives, they always work. i guess its a truism, that all of them have at least secondary effects.

2. i don;t know what you mean by 'improve' because its a normative judgemnt. for example, more weopons are being sold, some would say situation has improved, others would argue its deteriorated.

if you meant, to sell more, governments can cut taxes, impose taxes on substitute goods, impose price ceilings, bring in substitutes, make more people want to buy the product... there are myrriad ways .