Measures to Correct Market Failure

The following are some of the measures suggested by different economists to correct market failure:

1. Internalisation of Externalities: To achieve optimal allocation of resources in the face of externalities, Pigou suggested social control measures and the use oftaxes and subsidies. The state can interfere in all cases of external diseconomies of production to remove the divergence betweenprivate and social costs and benefits. For instance, it can ask the factory owner to move out of the residential area by providingappropriate facilities to the smoke emitting factory. In the case of negative externalities it should discourage their consumption and production bylevying taxes.

2. Provision of Public Goods: Since public goods are non-excludable and non-rivalled, they are not sold in a free market like private goods. Hence, they cannot be provided by private firms. In this situation, they can be provided by some public authority. As the benefits of public goods are indivisible, the state should make people share the costs of public goods so that everyone is made better off.

3.  Assigning Property Rights: Common property rights lead to externalities. Property rights relate to “who owns property, to what uses it can be put, the rights people have over it and how it may be transferred.” One solution is to extend property rights so completely that everyone has the right to prevent people from imposing any costs on them. Another solution has been suggested by Prof. Ronald Coase, according to him, market failure due to property due to property rights can be eliminated through private bargaining among the affected parties.

4. Complete Knowledge and symmetric Information: Market failure can be eliminated when rules are framed by regulating authorities by requiring producers to describe correctly about their products and prices. This will provide people with correct and relevant information about products. Market failure can also be corrected if produces produce high quality standard products and offer guarantees and warranties to buyers.

5. Control of Monopoly Power: Monopoly power can be controlled by the government by anti-monopoly laws and restrictivetrade practices legislation. These aim at removing unfair competition, preventing unfair pricediscrimination and fixing prices equal to competitive prices.The government can also bring down monopoly price to competitive level by price regulationand taxation.

6. Active Government Participation: The government can play an active role in correcting market failure. It can enact legislation and laws to banned smoking in public places. Goods which have maximum social welfare such as merit and public goods are to be provided by the government. The government can issue tradable permits that allow firms to produce a certain amount of something, commonly pollution.