There are some reasons that make government intervene in the economy and one of them is to correct the market failures. We have a market failure when the market does not lead to economic efficiency. In order to avoid welfare losses, the government should intervene to increase the efficiency.
Public good are an example of market failure. They are services which are clearly in demand, but which must be provided collectively by the Government. Public goods have the following characteristics: Non-excludability- it’s not possible to prevent people from enjoying its benefits and non-rivalry in consumption – consumption by one person does not reduce the availability of a good to others. Everyone consume the same amount of the good. Therefore, public goods like national defense, street lighting and beautiful gardens may not be provided in a free market.
The Tragedy of Commons gives us an example of open access resource problem, that is, it refers to the tendency for common property to be overused. The tragedy of the commons is the depletion of a shared resource by individuals, acting independently and rationally according to each one’s self-interest. “Commons” can include the atmosphere, oceans, rivers, fish stocks, national parks and even parking meters. We can understand this notion with an example of a group of shepherds who own a bunch of animals in a public land. Each shepherd decides to buy one more animal in order to increase his own profit. However, all shepherds do the same and which leads to an overpopulation of the land with scarcity of pasture. The tragedy of the commons is also known as a free rider problem.
In order to avoid this problem it is necessary to find solutions. Private property is such a mechanism. If everything that people care about is owned by someone who can control its use, then there are no externalities. Therefore, the market leads to a Pareto efficient outcome. Other example is to formulate a rule about how many cows can me grazed on the land.
Rita Cordeiro #672