The distribution of resources and the production of goods and services in a market economy are associated not only with the advantages of the system but are also accompanied by certain failures. The existence of market failures necessitates the intervention of the government in the functioning of the economy in order to reduce the negative consequences. In addition, the market needs government support in the area of competition enforcement, as otherwise uncontrolled mergers of companies may occur, leading to the emergence of monopolies in industries that are traditionally competitive. Essentially, market failure is a situation in which the market is unable to coordinate its economic choices to ensure effective resource use. Such a failure may occur due to the market ignoring external problems or lack of market interest in the production of public goods. Another cause for a failure is the market mechanisms being unable to make a breakthrough in the field of fundamental science and technology, as well as to implement a deep restructuring of the national economy if needed.
An exemplary case of a market failure is the story of Martin Shkreli. In 2014, his company Turing Pharmaceuticals bought the rights to the anti-AIDS drug Daraprim and instantly increased its price by an incredible 5455% (Boyle, 2015). Shkreli’s Daraprim was the only FDA-approved version of the drug, therefore, only Turing Pharmaceuticals could sell it in the US at enormous prices. Such an issue could only be resolved by employing state regulation of the monopoly’s activities through the adoption of certain norms of antimonopoly legislation. This legislation is called antimonopoly policy which is, in fact, a system of measures aimed against the monopolization of production and the development of competition among producers. Using these measures, the government must strictly monitor the negative consequences and take timely actions to eliminate them. However, governmental methods of managing monopolies do not always dictate or directly restrict entrepreneurship. They mostly ensure that entrepreneurs employ a healthy model of behavior but do not necessarily force them to act in complete accordance with state directions.
Infrastructure building is often one of the governmental requirements because it would help curb the free game of market forces. Arora (2017) states that “despite the mixed opinions, government’s useful role in supervision and regulation, building financial infrastructure and promoting macroeconomic stability has been well established” (pp. 17-18). The purpose of this regulation is to maintain stability in economic development, expand and strengthen the sphere of economic activity of the country and support the growth of the public sector. However, the objects of government intervention, according to Western economists, should be only low-income, long-term payback sectors, the development of which is necessary for the entire economy. Peng and Liu (2018) claim that “the government should take the realistic condition of economic development as the basis and help firms to progress with sufficient guidance and supervision” (p. 21). By spending budget funds on investments in those sectors, the government frees private capital from unprofitable expenses, while leaving the lucrative spheres of investment of private capital to avoid competing with them.
Concluding the essay, the following main roles of the government in market failure regulation can be formulated: support for competition and redistribution of income into building the infrastructure. The government has great opportunities to create stable and reliable capital for the general economy and socio-cultural purposes. Overall, the government has a wide range of means for both direct and indirect impact on the economy, the development and application of which could prevent or neutralize the consequences of market failure. With a stable and reliable infrastructure, the government primarily contributes to the strengthening of the economic and political positions of private entrepreneurs and protects the market from various failures, while at the same time creating favorable conditions for activities in the main sectors of the economy. In my opinion, the government plays a predominantly beneficial role in regulating market failures, creating a more healthy economic situation, and employing regulations that can improve the market situation. Most importantly, the government provides necessary legal adjustments that help outbalance disproportions in the market.
References
Arora, R. (2017). Government Intervention and Financial Sector Development. Development Finance, 53–78. Web.
Boyle, D. (2015). Martin Shkreli who raised the price of AIDS treatment to do the same with kidney pills.Daily Mail Online. Web.
Peng, H., & Liu, Y. (2018). How government subsidies promote the growth of entrepreneurial companies in clean energy industry: An empirical study in China. Journal of Cleaner Production, 188, 508–520. Web.