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Market Failure vs. Government Failure

When markets fail, governments are often called upon to right fix the problem. But the call for government action is often naive, says Nobel Laureate Gary Becker, and fails quite often. 

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While many are calling for a new government jobs program, Nobel Laureate Gary Becker says asking governments to solve market failures is often naive. Markets have uninformed buyers; governments, uninformed voters. Markets suffer from monopolies; governments, from duopolies created by two dominant parties. And while private financial companies took exaggerated risk in the run up to the financial crisis, so did the government-supported institutions of Freddie Mac and Fannie Mae. Government intervention must be a last resort, says Becker. 

What’s the Big Idea?

Becker offers some guidelines for government action in the marketplace. “Governments should have the dominant role in the military and police areas, in the judiciary, in protecting against massive pollution, and in providing a safety net for its least fortunate members (private charities are important but do not do enough). On the other hand, when market failures are relatively small and likely to be temporary, as in monopoly situations or in exploiting consumer ignorance, government involvement should be minimal, as in minimalist anti-trust policies, and in allowing consumers generally to make their own decisions.”


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