How a can a government correct market failure?
This is a good question. However, this question assumes something. It assumes that the government can correct the markets. I am not persuaded that the government can correct the stock markets. Of course, the government can try, but this might create more problems. Let me explain.
If the government tries to correct the markets by printing more money, like we just recently did, the markets might come up. This might seem like a good thing, but we do not know what will happen in the future. The printing of money might lead to inflation and this could hurt people in the long run.
Here is another scenario. If the government tries to keep the interest rates artificially low, like the United States did, then this might give the economy and markets a boost, but this too could have unintended ramification. For one thing, the low interest rates caused people to overspend and borrow, and look at the mess we are in now.
In a word, the more the government tampers with the markets, the worse thing might become. Moreover, government manipulation is unfair. We need to let bad businesses and companies fail.