Fail to Insure- (19.07.03)

One of the main examples of potential market failure would appear to be insurance, in particular public liability insurance. Over the last two years many companies have faced premiums increasing by several hundred percent. Certain types of industry, such as small mining companies, now face exclusion from the market all together.

This would not necessarily matter except that companies are legally obliged to have this type of insurance to operate. Thus the market failure translates into a social failure to which governments should respond. There are several potential ways this could be dealt with. Governments could act as insurer of last resort, could create an industry fund ( a form of taxation on all companies that benefit the uninsurable) or attempt some form of compulsion on insurance (through a per capita fee cap, for instance).

In reality all of these solutions would have a problem. The first is probably the simplest, but also potentially the most costly to the tax payer. The last is the cheapest but may just result in a higher social cost with insurers choosing to leave the industry (or refusing to comply). The compromise form of taxation is usually the best solution in the case of market failure.