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Module Four Assignment Crystal L. Luciano Department of Business, Southern New Hampshire University Eco 201 Travis Hayes August 18, 2023

Market failure is a situation in which an unrestrained market economy leads to too few or too many resources allocated to a specific economic activity. Some of the distortions that may affect the free market are price limits, minimum wage requirements, monopoly power, and government regulations. Market failure may occur on the market for several reasons including public goods. Public goods create market failures if the part of the population that consumes them doesn't pay but continues to use them. For example, police service is a public good that everyone gets to enjoy regardless of whether they pay taxes to the government or not. Market control is another cause of market failure. In this case, either buyer or seller decides the price of goods or services and prevents demand and supply from setting the price. Some commonly used tools the government can use to correct market failures are: (1.) Taxes and Subsidies: Taxes can be levied on goods or activities that generate negative externalities, such as carbon taxes on greenhouse gas emissions. Subsidies can be offered to encourage positive externalities. For example, subsidies for renewable energy sources. (2.) Regulations: Regulations can be used to set standards, rules, and guidelines that businesses must follow to ensure fair competition, protect consumers, and address externalities, such as regulations requiring truthful labeling of ingredients in food and drugs. (3.) Price Controls: The government sets a maximum price or a minimum price. For example, many cities impose rent controls. (4.) Public Provision of Goods and Services: In certain cases, the government may directly provide goods and services that are underprovided by the market. For example, the government may establish public transportation systems, and public parks to address market failures related to public goods.

(5) Information Provision: Market failures can arise due to information asymmetry where one party has more information than the other. Governments can intervene by providing accurate and transparent information to consumers enabling them to make informed choices. An example includes mandatory labeling to disclose nutritional information. Government intervention affects the supply and demand equilibrium by implementing regulations on products such as taxes. A great example of this is the nuisance fee that was applied to the stimulation for purchasing the robot dogs. This nuisance fee made it harder to sell the dogs at a price that I could make a profit from and that consumers were willing to pay. Government interventions like price ceilings and subsidies create customer or producer surplus. Price ceilings set a max price, but they can cause shortages and hurt consumers by reducing the surplus. Consumers benefit from price ceilings with the largest surplus, but producers may lose surplus. An example of price ceilings is rent controls rent controls limit how much landlords can charge monthly for residents and often by how much they can increase rents. Price ceilings have their advantages. But they could also become a problem If they continue too long or when they are set too far below the market's equilibrium price.

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References Mankiw, N. G. (2021). Principles of microeconomics (#9 edition). Cengage

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