—An easy example to explain, this problem occurswhen those who have insurance take greater risks. An uninsuredperson would less likely drive riskily than an insured person. Whensomeone purchases automobile insurance, the cost of his/heraccident is externalized to the insurance company. Thus, it seemsthey have a higher likelihood to be more careless and risky whendriving. The insurance company cannot monitor the driving of itsclients and thus, has incomplete information. Again, the insurancecompany must raise premiums in order to compensate for thosewho will drive riskily as a result of having insurance. This prices outthose who would not drive riskily if they had insurance and leads toinefficiency.
Some scholars argue that government intervention is a good way to preventmarket failures from occurring and to lessen their effects. They argue thatthe government does this in the best interest of the people. Many methodsexist for a government to utilize when intervening in the economy. I describesome of them as follows:
Taxation and subsidies
—The government frequently uses taxation(taking money away from agents) and subsidizing (giving money toagents) in order to correct market failures. Taxation can discouragecertain behaviors like monopolizing and overpricing. It is used toprovide for public sector production of public goods and is also used toenforce the other government intervention methods. It collects moneyto provide for national defense, public infrastructure and roads, publicsafety and health services and public schools, libraries and museums.Subsidies, on the other hand, encourage certain behaviors likeproducing a certain good. They can help reduce the cost of paying formerit goods like education, healthcare, and the arts, for example. Also,they can encourage production of certain crops and also reducescientific research costs for public interest.
Public sector production
—The government employs this method todeal with the problem of public good market failures. Using taxation,the government collects money and then provides public goods—likenational defense or law enforcement, for example—to the citizenry. Thegovernment can also nationalize industries to prevent monopoly andprovide public goods. Public works such as the Hoover Dam canprovide for beneficial infrastructure. Also, by providing for healthinsurance, the government can reduce costs and provide a public goodat the same time. By pooling a massive amount of people together tobuy insurance, the cost of insurance is driven down