The market on its own may cause market failure through externalities and market power. An “externality (is) the impact of one person’s actions the wellbeing of the bystander” (Gans et al. (2009, p.11). An example is pollution. Market economies usually do not consider the impact of their activities for example a dry cleaning factory. It can cause water pollution when they dispose off used chemicals. Government has a task of regulating, auditing and monitoring the activities of the market. Thus they can introduce regulating policies to protect the environment.
Market power is another result of market failure. “Market power (is) the ability of a single economic factor (or a small group of factors) to have a substantial influence on the market prices” (Gans et al. (2009), p.11). These monopolists may charge very high prices or low prices to prevent other firms from entering the market. The government may regulate the prices that monopolists may charge and their activities. The market economy does not distribute income fairly; it rewards people according to their ability to exploit market opportunities. The government economy may introduce taxes or social welfare systems to distribute income equally.
I had a personal experience in late February in Zimbabwe, in tobacco farming. My family is involved in tobacco farming and it was the selling season. A problem arose whereby some people were selling tobacco on the black-market at a very low cost. These people either stole tobacco or sell it at a very low price or they did not have farming licenses. Without a farming license this was the only solution. This situation was demotivating because their crop was at two risks. One was losing the crop for nothing or selling it to get the original capital. Also, farmers were incurring extra costs of increasing security. The government therefore introduced a policy that did allow selling the cash crop unless they had a farming license.
The policy helped to promote equity and efficiency. Most farmers like my father were prepared to hold on to the crop because they not going to make a profit. Moreover the selling price of tobacco rose, the government set a price ceiling. In addition it helped promote the security of the crop. Stealing the crop would not help since there was no place to sell it.
Therefore, the government can improve market outcomes because all farmers got the chance to sell and protect their crop such that next year they are motivated to plant and sell more.