Civil Engineering Reference
In-Depth Information
Key Points 10.1
❍
Market failure occurs whenever the free forces of supply and demand
over-allocate or under-allocate resources to a specific economic activity.
Examples seem to be widespread across the environment.
❍
Three reasons for market failure are (a) externalities, (b) the free-rider
problem and (c) asymmetric information.
GOVERNMENT INTERVENTION AND MARKET FAILURE
Governments intervene in various ways to correct market failures. Historically,
the preference had been for correction via legislation, but increasingly correction is
sought by influencing prices and knowledge. Some typical examples are outlined in
Table 10.1.
This indicates, in a very general way, some of the approaches that are
used to tackle different types of market failure. As the press describes it, stick, carrot
and tambourine approaches all play a part. To clarify what this means, in the next
sections we discuss some of the approaches used by government to resolve each of
the three causes of market failure, before going on to consider their effectiveness.
Table 10.1
Government policies to address market failures
Market
failure
Negative
externalities
Market Based
Instruments
Landfill tax
Government
spending
Publicity &
information
Government
regulations
Cost benefit
analysis
Water quality
legislation
Climate change
levy
Aggregates levy
Free-rider
problems
Provision of
public goods
Habitats and
species
legislation
Tax relief for
cleaning up
contamination
Asymmetric
information
Green
deal
Energy
performance
certificate
Building
regulations
Code for
sustainable
homes
Detailed
billing
