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Market Failure and Government Intervention

government failures may be so great that it is hard to evaluate whether intervention should occur or not.  However, if government intervention is to be designed, the law assures procedures for determining the least restrictive form of government intervention necessary.  In this section each of the different types of government intervention are examined for their effects upon markets.


Public Enterprise: Nationalization and Privatization

Public enterprise is usually viewed as less efficient than private organizations in providing a service.  In fact, many examples exist where both have competed with each other head-to-head.  However, when non-price rationing, national security, emergencies, or externalities are involved government organizations often prove superior.  During the U.S. Civil war, the North found that war profiteering left troops so poorly served that the federal government needed to take over production to control quality.  The North also found that private banks could not be relied upon properly to lend and ration the money supply. The Tennessee Valley Authority proved very effective in electrifying the Tennessee Valley where the private sector would not have.  

While there are innumerable examples of temporary reliance on government intervention, the private sector often finds a way of “cream-skimming” business from such enterprises.  For example, NASA found private interests competing more effectively with it in space travel.  Fedex and UPS began lifting business from the post office. Private Schools found themselves competitive with public schools- even after people paid their taxes for the public schools.

Nationalization occurs when the government takes over a private enterprise, typically because that enterprise fails and the government has some purpose for keeping it going.

Privatization occurs when the government sells its assets or organizations to private interests to run.  Typically this occurs because the government finds its management inefficient or because it finds its subsidies expensive- as in the case of the U.S. Postal service.


Regulation: Price, Output, and Standards

Regulation, particularly or price or output, often involves a “taking of property” from the regulated.  The law generally requires that such takings be justified and that such justifications be vetted by the proper process.  Nevertheless, regulation can lead very rapidly to severe and unsustainable burdens on markets.

There are four basic types of regulation pictured in Figure 17-7, each with its own side effects and distortions:

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