If, after careful analysis, an economist concludes that there has been a market failure, which of the following possible corrective actions might the economist favor? Why?
a. prohibiting the activity
b. charging fees for continuing the activity
c. requiring that the public be informed of the activity
d. government purchase of the item for the public
Any corrective measure should, as much as possible, be marketlike in nature.
a. This is not generally appropriate because it does not rely on a price mechanism to bring about change.
b. If the activity generates detrimental externalities, a fee would be appropriate in order to bring marginal private cost toward marginal social cost.
c. If the activity involves asymmetric information, the requirement to inform may improve a person's abilities to make an informed choice.
d. If the item is a public good, government purchase may be appropriate. However, in other cases, government purchase is not generally a useful corrective to market failure.
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