Is it time to abandon the market failure rationale for government regulation?

I was doing some research on foreign exchange markets. This market is largely unregulated with private parties, mostly banks, finding market exchange rates without the help of governments.

Under the market failure rationale for intervention, government will regulate a market where there has been determined a certain level of demand but enough supply to serve it. The standard definition of demand tells us that there is some consumer who is willing and able to buy something at a certain price. If a supplier is not willing and able to deliver that something at that consumers preferred price, no market is made.

At first blush we may ask why should the government be concerned with whether a market has been made where consumer and producer cannot come to terms on price. What ever happened to participants exercising some autonomy in trade?

Short answer may be that the government may have an interest in seeing some good or service move from producer to supplier. For example, the government may want as many people accessing the communication network as possible. Greater use may mean decreasing cost per user faced by the producer. Greater usage may mean faster distribution of information among as many citizens as possible.

But I still have this nagging notion that if private parties haven’t gotten together to make a market, no government agency should be involved in artificially creating a market. Aren’t there other less costly ways of promoting commerce? Let me know what you think.

About Alton Drew

Alton Drew brings a straight forward and insightful brand of political market intelligence. Alton Drew graduated from the Florida State University with a Bachelor of Science in economics and political science (1984); a Master of Public Administration (1993); and a Juris Doctor (1999). You can also follow Alton Drew on Twitter @altondrew.
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One Response to Is it time to abandon the market failure rationale for government regulation?

  1. Kenneth Ciszewski says:

    We had a similar conversation before.

    If you know anything about the history of telecommunications in this country, you know that making dial tone available at a reasonable cost in rural areas where it was very expensive to do so was part of the government’s overall strategy when telecommunications was a regulated monopoly industry. There was obviously some subsidizing of that cost from the other customers who cost less to receive dial tone (in urban areas). This was deemed an acceptable approach. Why? Because the telecom companies were guaranteed a reasonable (but regulated) profit that they could live with, but state public service commissions kept them from gouging.

    I think this was a case of facilitating a market that delivered good benefits but which private enterprise was not willing to fund on its own. There are times when the public good is served when the government “intervenes” in markets.

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