Market Failures and Government Economic Intervention

Market Failures and the Invisible Hand

The metaphor of the invisible hand of Adam Smith has negative consequences known as market failures. These include inequality, the dominant position of certain companies, pollution crises in market economies, and the abuse of the working class. Governments intervene to prevent uncontrolled market losses incurred by citizens, aiming to minimize the failures of the market economy.

The Welfare State and Economic Policy

The welfare state is a mixed formula where a series of basic rights are guaranteed to the entire population.

Market failure: These are the negative consequences of market functioning that occur when it is not efficient in the allocation of available resources. The main errors are:

Economic Cycle Instability

Economic cycles are fluctuations in economic activity, alternating between phases of expansion and recession. The economy is subject to cycles or gusts. After periods of expansion (economic growth), others come in recession and depression where there are idle production factors (unemployment).

In times of recession, the state may:

• Act: By consuming goods and services to artificially perform growth levels of economic activity (Neokeynesians).
• Intervene or not: Confidently leaving the crisis to resolve itself (Neoliberal).

Economic policy is the package of measures and instruments used by the state to intervene in economic activity and try to promote the progress of the country.

The Existence of Public Goods

There are situations where private enterprise is not sufficient to meet the demand of society. If the state does not provide them, nobody would. Their features include:

• These goods are not profitable for private companies.
• We cannot stop the people who have not paid for them from utilizing them.

The state supplies examples of public goods such as justice, infrastructure, and health.

• Pure public goods: Goods whose consumption by one person does not reduce the amount available for others.
• Pure goods: Offered to everyone or nobody; there is no rivalry to consume them. Examples: national defense, maritime lighthouses.
• Non-pure goods: There may be rivalry to enjoy them. Example: scholarships.

Negative and Positive Externalities

Negative externalities are the costs of an activity that fall on people other than those performing the activity. Positive externalities are the benefits of an economic activity received by people other than those who perform the activity in question.

Public Sector Intervention

Environmental policy: This includes the establishment of maximum pollution thresholds and the taxation of unit pollutants emitted per unit of substance (the more you pollute, the more taxes are paid). It also involves the establishment of pollution licenses. Society should be aware of the responsibility to avoid environmental damage.