Define market failure and give an example. Explain how government intervention may reduce market failure.

Market failure is when the price mechanism leads to an inefficient allocation of resources and a loss of economic welfare. One example of market failure is Public Goods. These are non-excludable and will therefore be under-provided in the free market. 
Government intervention can reduce market failure through regulation, taxation, or in the case of public goods, supplying the good which is under-provided in the free market. For example, street-lighting is non-excludable - it is impossible to stop non-customers from consuming it - and therefore no private company would provide it in the market. This market failure is corrected by the Government’s provision of street lighting, paid for by taxation.

Answered by Alex W. Economics tutor

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