Market Failure and Government Intervention

In orthodox economics theory, the concept which originated from Adam Smith is Inivisble hand. This invisible hand is nothing but price machanism of market that plays role in allocation of resource in an efficient market. Class school beleive that price is flexible and price adjustmetn will lead to equilibrium, where demand and supply equal one another.

To put it simply, classical economist value that if there is any excess or shortage of demand then price will bid up or down to reflect the nature this inequilibrium. Taking a very simple example of partial market equilibrium such as rice market if demand exceed supply than price will rise, alternatively if supply exceed demand then price will decline. The only motionless point is where supply equal demand.

Do market is always efficent? If it is true then why would still people be unemploy? Those who are willing to work but is not hired by firm. Then this is a critical evident against market failure. Furthure, in stock market where information plays important role, according to Stiglizt is market imperfection is the main cause of market failure.

This kind of failure need government intervention. Government play role to make market effiecient or in some case even market is efficient role of government is important because the role need to redistriubtion of income and ensure equality. The welfare theorem, widely known as Walras’s law mentions about Pareto optimal where not other alternative allocation could be better off without worsen of the others. This law implies the role of government.

Can government fail? True, breaucary, red-tap and corruption than make government policy fail. Then, we must think both of market failure and government failure.