Chapter 11

States respond differently to market failure and questions of how to properly intervene in the market to maximize the wellbeing of their citizens. Common causes of market failure are externalities, imperfect information, and failing to fulfill important social values. These market failures and the policy responses to them are explored in this chapter through three areas of government intervention: social policy, health, and the environment.

Governments develop social policies in part to respond to the market’s failure to distribute wealth in socially acceptable ways that reduce poverty, inequality or both. The major categories of social policy are universal entitlements, social insurance, means-tested public assistance, and tax expenditures. Different countries make different choices about how to approach social policy. The policies of social democratic welfare states such as Sweden, Christian democratic welfares states like Germany, and liberal welfare states as in the United States have different implications for citizenship and for people’s participation in the workforce and in society.

The case of health care illustrates problems with imperfect information and moral hazard. Much of the world has adopted the idea of health care as a social right of all citizens regardless of their position in the market, though the approach among wealthier countries varies significantly. There are national health insurance (NHI) systems, such as Germany, national health systems (NHS) like Great Britain, and finally, market-based private insurance systems, as in the United States. While wealthy countries deal with cost control, poor countries struggle with access.

Environmental issues provide classic examples of externalities and the tragedy of the commons. To deal with these market failures, different policy responses internalize costs in different ways, resulting in different people paying those costs. The major policy alternatives are command and control, cap and trade, and taxation.  Increasingly, it appears that governments will need to work together to forge common policy responses to global environmental challenges, though cooperation may be hampered by differences over how to tackle the problem, and what the cost is.

Learning Objectives

After reading this chapter, you should understand:

• The characteristics of different types of social policy.
   
• The differences between the three types of welfare states.
   
• How national health care systems vary in the developed world.
   
• The prominent policies proposed to cope with environmental problems.
   
• How market failures affect poor countries differently than rich countries.