What is the role of government in correcting market failures?

Governments intervene when market forces are defeated to allocate available resources effectively. This is usually a move to ensure that the market structure does not collapse. Economists feel differently about what should be done to correct market failures. Governments correct market failure by doing several things; by increasing taxes, for example, governments discourage the consumption of demerit goods. A government can correct the market failure by overturning its incentive structure. In some instances, the government may fail. Several factors may cause this. For example, regulatory capture is a situation whereby government institutions become lax in the performance of their duties. In short, they become too friendly with market players. Government failure is avoided by:

• Giving profit incentives.
• Engaging the private sector to investigate the root of the market failure and how to cut costs.
• Engaging in competitive tendering processes.
• Delegating some of its decision making powers to non-political entities.

Governments correct market failure by adopting effective strategies and policies. These strategies and policies are applied to different industries depending on their needs. Taxes, quality controls, and subsidies are some of the policies a government should use to remedy market failure. The primary purpose of government intervention is to secure effective solutions and to reduce losses.