Market-Based Solutions to Overcapacity：Principles and Measures

This paper takes stock of theoretical economic analyses of overcapacity,reveals the factors that induce actual capacity to deviate from market equilibrium, examines market-based mechanisms to resolve overcapacity, and identifies long-term mechanisms and assurances for market-based solutions to overcapacity. Given the limitations of market mechanism and the government's role, neither the market nor the government is able to resolve the problem of overcapacity on its own. In resolving overcapacity, market and the government should play their respective roles rather than replace one another. While the market is a dominant force in regulating capacity and achieving supply and demand equilibrium, the government should provide institutional assurances for effective market operation. Market-based solutions to overcapacity require the government to provide institutional assurances and create a system where market entities decide to enter and exit the market under effective restraints and incentives with a clear boundary.