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Market Failures and Official Sector Interventions

Author

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  • Anna Kovner
  • Antoine Martin

Abstract

In the United States and other free market economies, the official sector typically has minimal involvement in market activities absent a clear rationale to justify intervention, such as a market failure. In this post, we consider arguments for official sector intervention, focusing on the market failure arising from externalities related to business closures. These externalities are likely to be particularly high for closures arising from pandemic-related economic disruptions. We discuss how the official sector, including institutions such as Congress and the Treasury, can increase social welfare by acting to minimize the fixed costs of business start-up and failure, including the costs associated with unemployment, beyond the level set by private markets alone.

Suggested Citation

  • Anna Kovner & Antoine Martin, 2020. "Market Failures and Official Sector Interventions," Liberty Street Economics 20200923, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednls:88752
    Note: In the United States and other free market economies, the official sector typically has minimal involvement in market activities absent a clear rationale to justify intervention, such as a market failure. In this post, we consider arguments for official sector intervention, focusing on the market failure arising from externalities related to business closures. These externalities are likely to be particularly high for closures arising from pandemic-related economic disruptions. We discuss how the official sector, including institutions such as Congress and the Treasury, can increase social welfare by acting to minimize the fixed costs of business start-up and failure, including the costs associated with unemployment, beyond the level set by private markets alone.
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    Keywords

    official sector interventions; COVID-19; pandemic;

    JEL classification:

    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D25 - Microeconomics - - Production and Organizations - - - Intertemporal Firm Choice: Investment, Capacity, and Financing

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