Market failure is a situation where resources are not allocated efficiently according to market principles. To prevent market failure in public goods and shared resources, appropriate intervention and management by the government is necessary to improve the economic utility of society as a whole.
Most goods are allocated according to market principles, with consumers paying the price and suppliers receiving the benefits. This allocation process usually results in an efficient allocation of resources through a balance of supply and demand, but this is not always the case. For example, public goods such as lighthouses and streetlights, or common resources such as clean air or fish in the ocean, are not efficiently allocated according to market principles because people don’t have to pay to use them. This is known as market failure, and it’s important to prevent market failure because the social costs of fixing it are so high. Market failures can lead to a distorted allocation of resources across the economy, which can ultimately reduce the welfare of society as a whole. Therefore, a policy approach to prevent market failure is needed, and the method depends on the nature of the good, which requires a clear distinction between public goods and shared resources.
Public goods are goods that are excludable and non-rivalrous. Excludability refers to the possibility of preventing people from consuming a good, while rivalry refers to the property that once one person consumes a good, others are restricted from consuming it. For example, a lighthouse on the shoreline cannot be excluded from being enjoyed by certain individuals, nor does one person’s enjoyment of its benefits diminish the benefits of others. In this sense, a lighthouse is a classic public good. When a public good is non-excludable, it means that no one is willing to pay for the cost of consuming it, even if they produce it, so no one is willing to supply it voluntarily. In this situation, the government can step in to prevent market failure by providing the public good based on a comprehensive consideration of social costs and benefits.
To understand the nature of public goods, we can consider an additional example. Defense services are equally available to all citizens of a country, and the availability of defense services to one person does not reduce the availability to others. For this reason, defense services are provided by the state, and the government collects taxes from its citizens to pay for them. This is to solve the free-rider problem that can occur if the provision of public goods is left to the market.
On the other hand, common resources are not exclusionary like public goods, meaning that they are available to everyone for free, but they are contestable. This can lead to a serious problem known as the tragedy of the commons. Imagine that there is a patch of pasture that anyone can use freely. Cattle owners will bring as many cows as possible to feed it because they can feed it for free. If he brings in an extra cow and the pasture becomes increasingly degraded, the penalty is shared by all the cow owners using the pasture, so he suffers relatively little. However, pastures have a limited amount of grass, and at a certain level of cattle, the pasture loses its function. This leads to overuse of the resource, which in turn has serious consequences for the depletion of the common resource.
Failure to manage common resources threatens their sustainability and can lead to economic losses in the long run. For example, the tragedy of the commons is exemplified when certain fish species become endangered due to overfishing. Fishermen try to catch as many fish as possible for short-term profit, but this eventually leads to the depletion of stocks, which in the long run risks the collapse of the entire fishing industry. To solve these problems, appropriate government intervention is essential.
Market failure for public goods is relatively easy to prevent by having the government cover the cost of providing them. However, market failure with common resources occurs when individuals compete for access to more resources, as in the example above, and requires preventive measures to properly adjust the competitiveness of the good. Specifically, the government can either directly control the use of the common resource or grant private property rights to the common resource. Direct government control is a way for governments to curb demand by restricting the use of certain equipment, allocating time or place of use, or setting a unit of use or cost. For example, this could be done by restricting the catch of certain species of fish or only allowing fishing during certain periods of time. The granting of private property rights is a way to prevent the degradation of a common resource by taking advantage of people’s inclination to take good care of their property. Both of these approaches involve government intervention in the marketplace and require social consensus on control methods, procedures, and criteria for allocating private property rights. Success also depends on the ability of the government to control the people who use the common resources and the ability of individuals to manage their private property.
In the end, market failure in public goods and shared resources leads to a distorted allocation of resources and reduces the utility of society as a whole. In addition, if goods are not managed efficiently, the benefits of providing them are likely to be reduced. Therefore, it should be an important economic policy of the government to improve the economic well-being of its citizens by finding efficient ways to prevent the tragedies caused by market failure. Preventing market failures is more than just a matter of economic efficiency; it is an essential task to achieve sustainable resource management and social equity. Governments and civil society will need to work together to address these challenges and continue to work towards the efficient allocation and management of resources.
