How can the government deal with market failure

Market failure

Market failure occurs when the market mechanism of supply and demand does not lead to economically desirable results and the factors of production are not used in such a way that they bring the greatest possible return for the economy as a whole.

In cases of market failure, e.g. B. in the case of external effects, public goods or monopolies, the state intervenes in the market to prevent disadvantages for consumers or other providers or to achieve economically more sensible results.

So the state z. E.g. research and development work by companies is financially supported in order to create an incentive to carry out basic research, which causes high costs for the individual company, but at the same time improves the know-how in the entire economy, from which other companies also benefit. Without such state activities, companies would possibly do less research, since the costs only affect the researching company, but competitors cannot be completely excluded from the benefits because patent rights also expire after a certain period of time. However, low research activities are disadvantageous for the development of knowledge in the economy as a whole and lead to location disadvantages in international competition.

The financial market crisis that emerged at the end of 2007, which developed into a global economic crisis, also shows that the market mechanism in the money and capital markets no longer led to optimal results. One consequence of the collapse of international banks was that the banks' lending to one another almost came to a standstill. The collapse of the banking system could only be prevented by state intervention such as participation in banks, guarantees and financial aid for credit institutions within the framework of the financial market stabilization fund (see there).

Duden Wirtschaft from A to Z: Basic knowledge for school and study, work and everyday life. 6th edition. Mannheim: Bibliographisches Institut 2016. Licensed edition Bonn: Federal Agency for Civic Education 2016.