Which is an example of a market failure and a corresponding government intervention?

Which is an example of a market failure and a corresponding government intervention?

• A. Public goods (e.g., clean air); government provision or regulation
• B. Price controls on a single scarce good
• C. Tariffs on imports
• D. Subsidies to private monopolies

Answer: (A)

Public goods illustrate market failure because they are non-excludable and non-rivalrous. In a free market, individuals can’t be charged for using the good, so people have a strong incentive to free-ride, leading to under-provision. Clean air is a classic example: everyone benefits, one person’s use doesn’t reduce another’s, so the market on its own would likely provide too little of it. The government steps in to fix this by providing or regulating the good directly—through environmental standards, pollution controls, or public funding—so the societal benefits are realized. The other options don’t match the idea of correcting a market failure via public-good provision. Price controls on a scarce good address shortages by altering prices but don’t tackle the non-excludability issue that causes under-provision of public goods. Tariffs are trade interventions affecting prices and welfare rather than a mechanism to ensure provision of a non-excludable good. Subsidies to private monopolies alter incentives for a single firm, but they don’t resolve the free-rider problem or under-provision of a public good and can introduce other inefficiencies.

Public goods illustrate market failure because they are non-excludable and non-rivalrous. In a free market, individuals can’t be charged for using the good, so people have a strong incentive to free-ride, leading to under-provision. Clean air is a classic example: everyone benefits, one person’s use doesn’t reduce another’s, so the market on its own would likely provide too little of it. The government steps in to fix this by providing or regulating the good directly—through environmental standards, pollution controls, or public funding—so the societal benefits are realized.

The other options don’t match the idea of correcting a market failure via public-good provision. Price controls on a scarce good address shortages by altering prices but don’t tackle the non-excludability issue that causes under-provision of public goods. Tariffs are trade interventions affecting prices and welfare rather than a mechanism to ensure provision of a non-excludable good. Subsidies to private monopolies alter incentives for a single firm, but they don’t resolve the free-rider problem or under-provision of a public good and can introduce other inefficiencies.