Question

What is an example of the government’s role in meeting market failures in a mixed economy? A. operation of the stock market B. workplace health and safety laws C. corporate research and development spending D. nonprofit organizations providing community services

Short answer

B. workplace health and safety laws

Step-by-step solution

Understand Market Failures

Market failures occur when the free market does not allocate resources efficiently on its own. Reasons include externalities, public goods, and information asymmetries.

Identify Government Intervention in Market Failures

Governments often intervene to correct market failures by implementing regulations, providing public goods, and ensuring fair competition.

Analyze Each Option

Evaluate the given options to determine which one represents government intervention in response to a market failure.- A. Operation of the stock market: The stock market is primarily operated by private entities, not directly by the government.- B. Workplace health and safety laws: These are government regulations to protect workers, addressing externalities and information asymmetries.- C. Corporate research and development spending: This is typically driven by private investment and competition.- D. Nonprofit organizations providing community services: Nonprofits are private, though they can receive government support, they are not a primary government intervention.

Select the Best Example

The best example of government intervention to correct a market failure is B. workplace health and safety laws because these laws are established to protect workers, addressing market imperfections.

Key concepts

market failures

Market failures happen when the free market cannot allocate resources efficiently by itself. This means that even if everyone acts in their own self-interest, the overall outcome is not optimal for society.
Common reasons for market failures include:

• Externalities, such as pollution that affect people who did not choose to be affected.
• Public goods that are non-excludable and non-rivalrous like street lighting or national defense, which means people cannot be excluded from their benefits, and one person's use doesn’t reduce their availability to others.
• Information asymmetries, where one party has more or better information than the other, leading to unfavorable outcomes.

When these failures occur, the government steps in to help set things right.

government intervention

Government intervention in a mixed economy aims to correct market failures and promote economic stability and equity.
There are different ways governments can intervene, such as:

• Regulations to ensure fair competition
• Providing public goods
• Implementing social welfare programs

When a market failure occurs, the government can create regulations that help protect consumers and businesses. For example, workplace health and safety laws are regulations that protect workers from unsafe working conditions, which the free market might neglect due to cost-saving measures.

workplace regulations

Workplace regulations are government-imposed rules that ensure safe and fair working conditions.
These laws prevent exploitation and aim to reduce negative externalities such as workplace injuries and illnesses by:

• Setting safety standards
• Mandating fair wages
• Limiting work hours

By doing so, the government addresses market failures associated with asymmetric information where employees might not know the risks they face or may feel pressured to accept unsafe conditions to keep their jobs.

public goods

Public goods are items whose use is not limited to one person because they are non-excludable and non-rivalrous.
Examples include:

• National defense
• Public parks
• Street lighting

Because these goods benefit everyone and it's hard to charge people directly for their use, the private market might not produce them. Therefore, the government steps in to provide these goods, ensuring that everyone can benefit from them regardless of their ability to pay.

economic efficiency

Economic efficiency occurs when resources are allocated in a way that maximizes total benefit to society.
In a perfectly efficient market, every good is produced at the lowest cost and consumed by those who value it the most. However, market failures can lead to inefficiencies, such as:

• Underproduction or overproduction of certain goods
• Misallocation of resources
• Welfare loss

Government intervention aims to correct these inefficiencies through policies and regulations, creating a balance where the maximum possible benefit is derived from the available resources.