Friday, June 6, 2008

Market failure and the need for government intervention

Ken Lewis, chairman and chief executive of Bank of America, argues that for a secure energy future markets alone would not bring solutions; government intervention is needed as well. Markets always do not work and hence government intervention is needed to rectify market failures or to keep the markets in track. This article from one of the bigwigs of the financial markets calling for government intervention shows how far we can rely on the markets, despite all its failures arising from coordination problems and spillover effects. Markets are the supposedly the most efficient economic model but it is always not true because of several missing elements arising from coordination failures and externalities/spillovers.

In 1859, one economic player had a notably small role: the government. The oil industry was free to develop as the market dictated. Today we do not have time to depend solely on the market to drive change. Our desire to balance economic growth with protection of our climate, to reduce our dependence on global oil markets and to account for the long-term costs fossil fuels impose on our economy requires action not only from the private sector but from policymakers as well.

It should sound strange to hear the chief executive of a global bank calling for government intervention. It is not a position I take lightly. But it is also not unprecedented. The government played a significant role in electrifying the rural US and building our transport infrastructure. Landmark legislation such as the clean air and clean water acts have been environmental and econ­omic successes. And state governments often encourage the development of new industries.