Market Failure the OECD Defines Essay

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Government can have some influence on market failures, but cannot eliminate them. Conditions of perfect competition are usually created outside the influence of government. Often, government policy contributes to market failure rather than prevents it. Government can, however, reduce the impact of market failure. The programs by which government would do this must be well-conceived and well-executed, however, or they can worsen market failure. An example of this would be the bank bailouts. The government averted the direct market failure of the U.S. banking industry in the short-term, but in the long-term the government probably created a perverse incentive in the banking industry to increase risk-taking, knowing that the bank was not going to suffer the downside risk. Bailouts of the savings and loan industry contributed to this attitude among bankers, the concept of "too big to fail" creating a climate of risk-taking in the industry.

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Government intervention has worked, however, with antitrust laws. Market power is a source of market failure, especially once a firm abuses a monopoly position or engages in collusion in a duopoly or oligopoly situation. A firm is allowed to win a dominant market position, but is prevented from abusing this position by government intervention, thereby maintaining a better, healthier market than would otherwise exist. The antitrust case against Microsoft in browsers, for example, has helped to prevent that company from abusing its dominance of one product to dominate another, and the market for browsers remains healthy with multiple good options for consumers......

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