The competitive of the marketplace is very beneficial to the public in that it ensures that the very scarce resources are made available to the public in their highest values. Despite this benefit, there are certain limits to the marketplace. For instance, the production of a certain good that is economically important to both consumers and producers or even to the nation may be prohibited. In other cases, their production may either be below or above the average or required production.
This situation is referred to as market failure which occurs when the marketplace fails in its allocation of resources meant for production of goods by either under allocating or over allocating the resources. When such cases occur, the government, then, comes in to play its economic role to the public. This is because the marketplace is considered a private sector of the economy rather than a public venture.
However, the government, in its efforts to revive the economy mainly through taxation, it faces certain inefficiencies which have the potential to prevent the efficiency of the process. This paper will, therefore, look at the conditions at which the marketplace is considered to have failed and the role played by the government in during such interventions (Block 1).
Public goods may be defined as goods whose consumption by one individual does not hinder other individuals from consuming the same good. Public goods are characterized by two aspects; nonrivalry and nonexcludability. Nonrivalry applies to a situation which allows for simultaneous consumption of a good by many people without interference. Thus, in this aspect, public goods can be consumed simultaneously by everyone.
For instance, enjoyment of a well protected environment by one person cannot hinder other members of the public from enjoying the same. The nonexcludability aspect of public goods implies that everyone is inclusive in the benefits associated with the public good as long as it exists. This is because there are no ways that can effectively prevent some people from enjoying the good. For instance, there is no way some public members can be prevented from enjoying street lights as long as they are in place and on.
These characteristics of public goods creates a condition known as free rider problem whereby any public good, regardless of the producer, is enjoyed by everyone most of which are not payers of the good because, logically, many people cannot pay for something which they can get hold of free of charge.The demand for public goods is, therefore, not expressed in the marketplace due to the free rider problem.
Due to this factor, many potential firms are not willing to provide resources that would avail the good but in a profitable basis. This is the time when the society directs such needs to the government to provide the desired good. A very good and significant example of a public good is the homeland security defense which undertakes efforts to provide protection to all Americans since it can never exclude some people from obtaining benefits from its services.
In addition, the benefits associated with the good are economical taking into consideration the costs involved in availing the good to citizens. Like discussed earlier, private firms find it uneconomical to them to venture into the good as the free rider problem hinders them from gaining profits from provision of the good.
Therefore, this is the point where the market fails by not providing adequate allocation of resources to the provision of the good. The government then undertakes its economic role by providing the good to Americans and due to the free rider problem, the government uses strategic plans such as taxes to finance the provision of the good (McDonnell 2010).
To understand the concept of public goods better, let us review the concept of private goods and try to compare the two. Public goods are produced on the basis of the competitive marketplace. They cover the common and wide range of goods available in shops and stores for purposes of sale. Contrary to public goods, private goods are characterized by two aspects which are rivalry and excludability.
They are rivalry in the sense that once an individual buys and uses a good, the good is no longer available for another individual to buy and consume. Similarly, private goods are excludable in the sense that individuals who are not willing to pay for the goods cannot enjoy their benefits since only those who pay the required price for the good are provided with it. In other words, private goods are provided for profitability by the providers unlike public goods whose provision is non profitable.
The marketplace, therefore, ensures that private goods are always made available to the customers. In addition, efficient allocation of resources to the same is made especially now that competition for consumer goods is on the rise. Producers therefore use the best technologies there is in the production of such goods in order to maintain their market (Block 1).
Externalities may be defined as the involvement of a third party usually out of the market transaction in the accruement of costs and benefits involved in the marketplace. It occurs when the costs and/or benefits associated with a market transaction are passed over to another person other than the buyer and the seller. The third party may be involved in the marketplace transaction positively or negatively hence the existence of positive and negative externalities.
Negative externalities occur when a third party gets involved in the production cost of a good without gaining any benefits from the production process. These costs passed on to a third party are referred to as spill over costs. A good example of a negative externality is the environmental pollution resulting from the factories such as chemical producers and petroleum refinery plants.
The wastes produced during the production of goods, be it chemical wastes or odors finally find their way into the society. Most of the people who are affected by theses wastes may not even consume the product being produced when the waste was produced. Some of these effects on third party may even bring health associated problems during which the affected individuals have to seek and pay for their medical services without compensation from the production firms.
Negative externalities have positive effects to the producers in the sense that the costs passed on to the society, which is the third party in this context, reduces the producers’ marginal costs because their production and supply curves do not include those production costs that were instilled on the third party.
Due to the reduced cost of production involved, the firms are likely to get more profits since the amount of goods produced does not change at all but rather the production cost gets reduced. However, this is considered as a market failure In that there is over allocation of resources to the production of that specific good which is evidenced by production of too many units of the commodity at the expense of the third party (Cowen 1).
On the other hand, positive externalities occur when third parties, external from the marketplace, benefit from the production or consumption process involving the producer and the consumer. These benefits may occur to individuals or to the society as whole during time, which the beneficiaries enjoy the spillovers without having to compensate payments.
A very good example of a positive externality is education. While individual benefit personally from education by being assured of good jobs which would lead to high income rates, the society at large enjoys some benefits from it without compensation. These benefits may include economical benefits in providing a more productive workforce or social benefits such as reduced crime cases as well as increased welfare activities and other programs.
The result of positive externalities is that the demand curve of the market does not reflect the spillover benefits but rather the private benefits only. This results to an equilibrium output which is much less than the optimal output and this influences the market in its failure to allocate adequate resources for the production of such commodities (Cowen 1).
When the marketplace is unable to efficiently provide public goods or is unable to deal with externalities, many people or the society as a whole are affected. It is during such times that the government intervenes to play its economic role to the public. This could be done through one or a combination of various economic strategies adopted by the government.
One of the most commonly used methods is the use of direct controls where the government limits the exercising of the particular activity causing negative externalities to the community. Implementation of direct controls involves forcing the firms in question to incur the production costs that would have otherwise been incurred by the third party.
For instance, the clean-air legislation is a direct control in which factories are required to put in place control technologies which would ensure uniform limited standards of air pollution/emissions.
To ensure that these laws are followed fines and imprisonment penalties are imposed on those who violate the laws. Direct controls have the effect of increased marginal costs of production. The other strategy of handling negative externalities by the government is the imposition of specific taxes or charges where the government requires the payment of a given amount on each unit production of a commodity whose production affects the public negatively.
The firms must therefore, pay the taxes to compensate for the externalities or can choose to use advanced technology to produce the commodity which would, in return, prevent the occurrence of the externalities. Either way, production firms suffer from increased production costs (McDonnell, 2010).
Besides countering the negative externalities, the government also has strategies to handle positive externalities that are disseminated. These controls constitute the third strategy by the government in its economical intervention in the marketplace. It involves the use of subsidies and product provision by the government. Subsidies may be given to the buyers/consumers or to the producers.
To the customers, it involves giving discounts on the product whose resources are under allocated. On the other hand, the buyers are given subsidies by the government by reversing the taxation imposes. The producers’ costs of production reduce as the supply increases. Finally, the government can correct large positive externalities by providing the product at lower costs or at times for free.
However, the provision of such goods by the government may entail exclusion whenever possible to minimize the effect of free rider problem. Such products include education, medical service provision, just to mention a few. However, the market may regulate the externalities by limiting the governments’ participation in the economy (McDonnell, 2010).
The role of the government in maintaining a healthy economy to the public is very important because the marketplace only caters for those who have the ability to pay for their products. In addition, the production of private goods may lead to negative as well as positive effects (externalities) to the public.
When the market is unable to handle such externalities, the government intervenes in order to protect the society. However, the government is faced with some challenges in its efforts to curb the externalities most of which are politically oriented. For instance, provision of quasi goods to the public may be blocked by powerful politicians so that they can gain personal benefits from the supposed costs.
In other cases, the programmed strategies may fail to work and this failure is more likely to require further funding to facilitate the achievement of the proposed economic goals. In addition, the government may, in its efforts to regulate market externalities, overregulate or underregulate the production spillovers.
Block, Walter. Public goods and externalities. 1983 – April 6, 2011,
Cowen, Tyler. Public goods and externalities. 2002 – April 6, 2011,
McDonnell, Bruce. Principles of macroeconomics. 2010.