Through the signaling function, prices adjust in determining where scarce resources should be allocated. National Systems of Innovation: Toward A Theory of Innovation and Interactive Learning. In practice, governments in market economies intervene directly in the production of output and input prices through a variety of commodity-specific policies mostly in other objectives, for instance, to raise government revenues, or protect domestic producers from foreigners. Often market failure results from consumers suffering from a lack of information about the costs and benefits of the products available in the market place. In some instances, government involvement fails to work in the anticipated way because of the unplanned costs that frequently comes about. Roy, C. E. 1980. Start studying Market Failure and the Allocation Function of Government. (2019) 'Governments and Intervention in the Allocation of Resources in Market Economies'. This basic statement assumes that it is possible to arrive at a collective judgment as to the desirable income distribution. Information Failure: Government action can have a role in improving information to help consumers and producers know the ‘true’ cost and/or benefit of a good or service and this is done by: Compulsory labeling on cigarette packages with health warnings to reduce smoking, Improved nutritional information on foods to counter the risks of growing obesity, advertising campaigns to raise awareness of the risks of drink-driving. This is usually because the benefits that the free-market confers on individuals or businesses carrying out a particular activity diverge from the benefits to society as a whole. The government has to perform various functions such as maintaining law and order, defense against foreign attacks, providing healthcare and education, building infrastructure, etc. "Governments and Intervention in the Allocation of Resources in Market Economies." They may provide public goods, regulate private activities to counteract other market failures, and act to prevent or limit rent-seeking activities and the abuse of market power. The government also determines the minimum wages paid to different types of workers. Retrieved from https://ivypanda.com/essays/governments-and-intervention-in-the-allocation-of-resources-in-market-economies/. The following diagram show how the government uses indirect tax and subsidies to control the relative price of a commodity. This is done through price signals whereby when demand is high, prices are raised by suppliers so as to increase their potential profit leading to an increase in the quantity supplied. Address: Cyprus Headquarters “Economic Imperialism,” Quarterly Journal Economics, 115(1)|, pp. Market failure occurs when freely-functioning markets, fail to deliver an efficient allocation of resources. For example, the government may decide that, as part of their economic policy, it needs to spend more money on developing collective goods such as roads, education and health care. "Governments and Intervention in the Allocation of Resources in Market Economies." This essay on Governments and Intervention in the Allocation of Resources in Market Economies was written and submitted by your fellow student. 2000. On the other hand, the government may choose to give subsidies to consumers to enable them purchase commodities which are being offered at a high price. Consumer Credit Act: According to this act, consumers should be handed a copy of the credit agreement and should be aware of the interest rates, length of loan while taking a loan. Subsidies are used to encourage production and consumption which is particularly appropriate in the case of merit goods and products that create positive externalities. We utilize security vendors that protect and ensure the integrity of our platform while keeping your private information safe. There should be proper notice before dismissing a worker or else it will be treated as unfair dismissal. When the price structure reflects the underlying economic scarcities of outputs and inputs, the allocation of resources resulting from individual producer’s and consumers’ behavior is expected to be consistent with maximum and sustainable economic growth (Lazear, 2000).

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