Market failure
In modern mixed-market economies, national strategy starts from the premise that a wide range of national objectives will be pursued through decentralized economic markets in which firms and consumers are relatively free to make informed decisions that influence their own welfare ( 1994). The rationale for government action results from market failures, in the sense that some distortion in information or incentive structures is producing the wrong signals for private actions, or from a desire to alter the distribution of income that results from private decisions. Judgments on what constitutes a market failure or an unacceptable distribution of income are obviously intensely political decisions, and those judgments and the extent and form of intervention to correct perceived failures differ substantially from country to country ( 1994). Given the formal defense, that the performance of a successfully functioning market cannot be improved on, economists derive one of the major classes of reasons for government intervention from what are called market failures. One form of market failure involves common property resources. Common property resources and economic theory show that, in market economies, common property resources such as fisheries, public grazing land, and forests will be over-exploited, often to the point of destruction ( 1994).
A major area of government activity is to regulate the use of common property resources. This can be done, for example, by creating property rights in the form of tradable quotas to exploit the resources. The total quota is set at the optimal level of exploitation and the individual quota units go to the highest bidders. With common property resources, the biggest problems facing governments lie not in figuring out what needs to be done but in having the courage to proclaim the solution and the ability to enforce it ( 1999). Another class of market failure comes from goods that, once produced, can be consumed by everyone and the consumption of which cannot be controlled. If everyone can use a publicly broadcast television signal, it is non-rivalries. If its consumption cannot be prevented, it is non-appropriable. There is then no way for a private firm to produce the product for profit because the firm cannot make its use conditional on a payment. The state is the obvious producer of such public goods as police protection and national defense. It should be noted that, if consumption can be prevented, as with a fenced park, or if social conscience can be relied on, as with public television, a non-rivalries good or service can be produced by private organizations ( 1999).
Markets work best when the same information is available to buyers and to sellers, so that they each have similar knowledge of what to expect from any bargain that they reach. Information asymmetries can lead to various market failures, of which adverse selection is but one example. Typically, individuals buying insurance know more about their exposure to risk than do the companies selling it. As a consequence, when the companies charge a rate that allows them to cover all their costs over all the policies they write, those buyers who are most exposed to risk will find the insurance a bargain, while those who are least exposed to risk will find the rate expensive. This alters people’s behavior over what would happen if the company could write a policy for each individual that adequately reflected that individual’s own risk exposure. Using the result that perfect competition leads to an optimum allocation of resources, many economists have argued that all deviations from perfect competition should be regarded as market failures (2002). Perfect competition requires, among other things, the absence of both differentiated products and significant scale economies. A differentiated product means that each product line is different from every other product line of the same generic product, both within and across firms. Significant scale economies occur whenever the minimum efficient size (MES) of the firm is large in relation to the total market demand at a price that fully covers costs. Since one or both of these conditions is present in the great majority of manufactured goods and services, it is not very satisfactory to regard everything but perfect competition as a market failure ( 2002). Market Failure is a concept within economic theory wherein the allocation of goods and services by a free market is not efficient. The analysis of the causes of market failure plays an important role in many types of public policy decisions and studies. However, some types of government policy interventions, such as taxes, wages, price controls and attempts to correct market failure may also lead to an inefficient allocation of resources. This creates government failure. An example of Market failure is in the case of monopolistic control of a service or goods. In this case the monopoly means the ability of the provider to control prices according to his wish and not to the interaction with other stakeholders.
Government Failure
The starting point for distinguishing between the market and the non market is that agents of the former derive their principal revenues from prices charged for output sold to purchasers who can choose whether to buy, what to buy, and from whom on the basis of their disposable resources. Non market organizations, whether close to the state or not, derive their revenues chiefly from taxes, fees, donations, or other contributions that are generally not directly linked to services rendered. Public policies designed to compensate for market shortcomings generally take the form of legislative or administrative assignment of particular functions to one or another Non market agent in order to produce the specified outputs that are expected to redress the market’s shortcomings. Such outputs can be regulatory services, pure public goods, quasi-public goods, and administering transfer payments ( 1998). Unlike private-sector not for profit organization (NPOs), government and its agencies derive most of their revenue from mandatory taxes or user fees. These are provided simply by virtue of the fact that membership in that polity, to a large extent, is universal and compulsory (1998).
Government failures can encompass a wide array. First of all the information available to government may be seriously deficient and its perception and understanding of the consequences of any action it may take flawed. Government might then simply aggravate the error it is trying to correct. Second, governments do not have full control over their activities, although their authority is evidently more extensive than what is available to private agents. Barring an anarchic transition, the role of the state in reality will have to be much larger than the advocates of neo liberalism like to admit. Its central focus should be providing order to the transformation commensurate with the capabilities that the state has at its disposal or can quickly acquire ( 2001). The state can do so through various means, including by wielding its coercive prerogatives. But these are better used sparingly. Instead, policy makers should be concerned about actively promoting governance capabilities for the major tasks at hand. Aside from the humdrum aspects of presiding over the society, during the transformation these all revolve around the orderly destruction of assets in place that become superfluous in a market context and the encouragement, within a set framework, of creative activities, particularly through new small firms ( 2001).
Apart from aspirations for minimal government, the maxim to be heeded should be that government intervenes in economic affairs only where market failure is most pronounced and even then only in a guarded manner. When governance capabilities fall short of what is deemed necessary to maintain order in the transformation, it behooves those managing the transition and their advisers, as well as assistance-delivering agencies, to explore with determination ways and means of upgrading and extending governance capabilities. Only in this manner can a sociopolitical consensus be forged and sustained through the hobbled path leading toward the realization of the transition’s goals ( 2001). Market failure is the inability of private enterprise to provide goods and services efficiently in the public interest. Similarly, government failure means that government has failed to accomplish its economic purposes in the public interest. When government fails to define or protect public and private property, economic players may try to take that property (Mann 1996). Sometimes, government fails in its roles, such as antitrust or consumer protection, to promote efficient market competition. This often happens as an accidental result of poor legal or administrative process. An especially expensive case of government failure involved the savings and loan (S&L) scandal of the US. The federal government and the states deregulated the S&L industry by allowing more entry, more S&L investments in real estate and other risky ventures, increasing federal insurance coverage on deposits, and allowing a sole person to own an S&L. The S&L lobby was understandably supportive. Any loss due to unprofitable or illegal S&L diversions would be covered by the federal government. Depositors were insured, so depositors had no incentive to make sure their deposits were being well spent. However, the federal government clearly did not look after the insured deposits either. They did not enforce the public trust in federally insured money ( 1996). Government failure occurs when a government intervention causes a more inefficient allocation of goods than would occur without that intervention. Just as a market failure is not a failure to bring a particular solution into existence at desired prices, but is rather a problem which prevents the market from operating efficiently, a government failure is not a failure of the government to bring about a particular solution, but is rather a systemic problem which prevents a government solution to a problem.
Government Intervention to market failure
Government intervention disrupts the smooth functioning of a free-market economy, thereby generating the need for additional corrective intervention. This vicious circle by which government-induced problems lead to a larger role for government will eventually push society toward socialism. The only way to halt this process is to resist the initial temptation to improve society through government action .In contrast to the doctrine of natural rights; utilitarianism provided a flexible and pragmatic basis for government intervention. Any reform resulting in favorable consequences for society as a whole was considered legitimate (1998). Economic interventions common in contemporary governments include targeted taxes, targeted tax credits, minimum wage legislation, union shop rules, contracting preferences, direct subsidies to certain classes of producers, price supports, price caps, production quotas, import quotas, and tariffs. The government intervenes in market failure One instance of government intervention due to market failure involves the United States and the rise of Gas Prices in 2005 to 2008. The US government intervened by implementing price control and introducing measures to conserve energy to reduce the use of oil and petroleum prices. This did not contribute much to the drop in oil prices in the succeeding years. Another instance of government intervention due to market failure involves the Philippines and the rising rice prices of 2007 to 2008. The Philippine government intervened at the failing market by selling rice at lower prices and suspending the export of rice products. This gave little assistance to the failing market.
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