What are five consequences of a market failure

Market Failure: Definition, Cause & Internalization Strategies

The Coase theorem explains how these contractual solutions work. However, there are a number of obstacles that prevent private solutions from always working. Transaction costs, negotiation and coordination difficulties are some of the reasons.

2. State internalization measures

1. Regulatory regulations

2. Market-based measures

Market failure as a justification for state intervention ?!

In a social market economy, the state takes on the role of a passive observer who only takes on the legal framework for the market and guarantees the freedom of all participants. But since the beginning of the modern market economy there have been periodic economic depressions as well as tangible crises that made state intervention urgently necessary.

Economists such as John M. Keynes (Keynesianism) took the view that in times of crisis the state should support the economy through targeted subsidies and other financial contributions, even if this meant that the state would be temporarily over-indebted.

In fact, governments to this day act to intervene in the event of market failures and inefficiencies. Another often accepted government intervention is redistribution between rich and poor.

State intervention in the economy is, however, always the subject of professional criticism, since with an active allocation of market goods by the state, the Pareto efficiency is effectively switched off, i.e. without self-regulation of the market, an improvement in one point will only lead to a deterioration in the situation elsewhere .

There is also often fear of a cumbersome bureaucracy that could have worsened the market situation in the long term.

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