Can governments correct market failures? Essay

Whatever economic system a country adopts, on that point is always a role for the brass due to foodstuff failures. Can governments correct market failures? Illustrate your answers with example.Part OneAdam Smith who proclaimed the principle of the invisible hand that holds every individual is led, as if by an invisible hand, to achieve selfishly the best good for all. Smith saw unity between private interest and humanity interest. In his view, any government interference with free arguing is almost certain to be injurious in the economic world. He recognized that the virtues of the market mechanism be fully realized only when the checks and balances of perfect competition ar present.Under the perfect competition and with no market failures, markets will squeeze as many useful goods and services out of the available resources as is possible. However, in reality, markets may fail to section well under numerous reasons. According to Wolf1, there are two kinds of failures whic h are i) insufficient allocation of resources in terms of the quality of products and equipment casualtys and ii) inequitable diffusion of income or wealth. To be more specific, it includes the following the inability to provide general goods, negative externalities, imperfect information and increasing returns to scale and monopoly.Public GoodsA public good is a commodity or service whose benefits are not depleted by an additional user, and for which it is generally difficult or impossible to cast out people from its benefits, even if they are unwilling to pay for them. In contrast, a private good is characterized by both excludability and depletability 2. Some examples of public goods are proviso of national defense, the building of highway network or the support of basic science. Adequate private labor of these public goods will not fade as the benefits are so widely dispersed across the population that no single firm or consumer has an economic incentive to provide them. Since private training of public goods is insufficient, government must step in to provide public goods.PA302 (1) CHAN Sau-fung (S05012153)ExternalityThis is another type of inefficiency arises when there are spillovers or externalities. These effects occur when firms or people impose costs or benefits on others outside the marketplace. The phenomenon of externalities is universal. Since our society has become more densely populated and as the volume of production of energy and other material ontogenesiss, negative spillover effects will be generated. This is where governments come in. governing regulations are designed to control externalities like air and wet pollution, hazardous wastes, unsafe drugs and etc.Imperfect InformationIt is idealist to assume that producers/sellers and consumers/buyers to wear all information before they make their decisions. In reality, producers, providers or sellers have more information about their products than their customers. The decision b ehavior of customers, to a certain extent, is relying on the information they obtain from their friends or mass media. An optimal decision eject never be made as it is impossible for the consumers to obtain adequate or perfect information. In this connection, governments in developed countries have to step in to enact legislation to protect consumers.Increasing Returns to scaleIncreasing returns to scale arise when a balanced increase in all inputs leads to a more-than-proportional increase in the level of turnout. For example, when doubling inputs leads to greater than double the quantity of output, we have increasing returns to scale. As firms become larger and larger, difficulties of control and management may at long last produce decreasing returns to scale.MonopolyPerfect competition in a market arises when there is a sufficient number of firms or degree of rivalry such that no one firm can affect the price of that good. Imperfect competition, on the other hand, is a seriou s deviation from perfect competition. An imperfect contention is one whose actions can affect a goodsprice.PA302 (1) CHAN Sau-fung (S05012153)At the extreme of imperfect competition is the monopolist, hence, a single supplier who determines alone the price of a particular good. Monopoly power leads to prices that rise above cost and consumer purchases that are reduced below efficient levels. The pattern of in like manner high price and too low output is the hallmark of the inefficiencies associated with monopoly power. In slightly cases, the government has to take travel to curb monopoly power. The government regulates the prices and profits of monopolies, as is now the case for topical anaesthetic utilities.Part TwoEven though the market mechanism is an admirable way of producing and allocating goods, sometimes market failures lead to deficiencies in the economic outcomes. political relation steps in to correct these failures in order to make the economy function more efficie ncy, maintain the equitably and to promote economic growth and stability. film RegulationsDirect regulation is where most of a good people are allowed to use is directly limited by government. The purpose of the regulations is to stabilize the running of the national economy. For instance, governments approach to correct monopoly and pollution (externalities) to encourage efficiency by introducing legal antitrust constraints on business behavior or antipollution laws.Incentive PoliciesIncentive programs are more efficient than direct regulatory policies. The two types of incentive policies are either taxes or market incentives. A tax incentive program uses a tax to redistribute income so as to lessen the situation of unacceptable inequalities of income and wealth. In fact, the tax often yields the desired end more efficiently than like a shot regulation as this solution embodies a measure of fairness about it, i.e. the person who conserves the most pays the least tax.An alternativ e to direct regulation is some type of market incentivePA302 (1) CHAN Sau-fung (S05012153)program that is a plan requiring market participants to certify total consumption. For example, when there is high inflation and unemployment rate, the government introduces monetary policies, hence, the changes in money supply and interest rateswith a view to stabilizing through macroeconomic policies. Or, during sloweconomic growth, the government will reduce budget deficit and raise national savings rate in order to stimulate growth.Provision of public goodsIn case there is inefficiency in public goods, government must step in to provide public goods by spending expenditures. Apparently, the government plays an important role in promoting efficiency, achieving a fairer distribution of income, and move the macroeconomic objectives of economic growth and stability. However, in reality, government noise does not allow fine-tuning, and when the problems change, the government solution often re sponds far more slowly. Government intervention leads to more government intervention.In short, Government can in some instances improve and extend the functioning of the market. However, the result of government intervention sometimes is worsened that if it did not intervene at all. This is what we call non-market failures, i.e. government failure. Due to the difference in demand and supply in government, its bureaucratic structure, the step in of the government may create more catastrophic effects than market failures.InefficiencyThe revenue that supports governments activities is mainly generated from taxes. Unlike other business sectors, the output of the government is difficult to measure. As it is not required to maintain competitiveness in order to survive, a government is unlikely to try its best to research possible ways to improve its efficiency. The sometimes inherently inconsistent objectives or unrealistic goals may also lead further inefficiency. As there is no compe tition, cost overruns are also common in some government sectors. The government contractor may often revisetheir prices upwards in the mid-course as they viewed that raising prices is justified. The disjunction between costs and revenues leads the government fails to address the issue in an efficient manner.PA302 (1) CHAN Sau-fung (S05012153)Cost ineffectivenessThe government sectors have its own innate standards. According to Wolf3, it calls internalities. They may include the agencys goal which are used to guide and evaluate that agencys performance and the performance of its personnel.Government agencies usually stick to standard operating procedures and are reluctant to make changes. They tend to protect and increase benefits to the interest groups they are supposed to regulate. Moreover, there are numerous reasons for government agencies to maximize their budgets. They will try their best to spend it all at the end of the year. If not, it will be allocated a smaller kernel i n the next year. In this connection, government agencies would prefer to invest their money in more advanced technological systems and cares very little about a newer technology really works or is cost effective or not.For example, they would prefer to invest money in national defence, the most advanced artillery systems rather than other more useful purposes that will bring substantial benefits to public. Moreover, most of the government sectors such as the foreign affairs and intelligence agencies propensity to collect and control timely information. However, acquisition and protection of information requires great cost and there may be a point at which there is a diminishing return. Therefore, internalities tend to inflate costs and raise supply functions.Derived externalitiesWhen government intervenes due to market failure, it may create unintended or unexpected side effects which may not be known immediately. This is called a derived externalities. For example, in Oct 1997, HKs stock market came under attack from currency speculators. The HKSAR monetary Authority refused to take proactive action during the early stages, but decisively intervened in the stock market in Aug 1988. The intervention not only cost HKs image as a free market economy but also starts a series of economic crises such as deflation, high employment rate and the greater public demand for more government assistance to disadvantaged groups.Distributional inequityPA302 (1) CHAN Sau-fung (S05012153)Market activities may produce distributional inequity, however, government intervention that intends to remedy a market inequity may itself generates another kind of distributional inequity in form of power and favour. As an extreme example illustrated by Wolf, in communist society, the government correct inequity create a system in which both power and privilege and quality of life are much worse than before.ConclusionIn fact, both market and government may fail. Perfect market or govern ment is never existed. I opine that governments intervention, to a certain extent, is essential in maintaining the markets order. However, over-intervention may cause more harmful effects. Therefore, what is more important is who is running the government. An effective government is performing the role of check and balance. It sets up regulations and guidelines so that the private business sectors can follow and modify then to take on global competition. And, at the same time, it helps to protect our labour and avoid exploitation. On the other hand, there are areas in which the market can help government, such as in the areas of education and the privatization of government agencies. Therefore, whether the harmony between the government and market can be maintained depends solo on the one who runs the government.Reference1. Market failures http//elmo.shore.ctc.edu/economics/market.htm2. Government Policy & market failure 2.2. http//wwwz.gsu.edu/ecorlcx/colander-Ch15-market failure .ppt 163. The role of the government http//www.clas.ufl.edu/user/rjohnson/graduate_policy_Analysus/Market failure.html.4.Business and Government in the Global Marketplace. (7th edition), Murray l. Weidenbaum5.Economics (14th edition), Paul A. Samuelson & William D, NordhausPA 302 Assignment OneFrom Chan Sau-fung(S05012153)1 Wolf, C Jr (1993) Markets or Governments Choosing between Imperfect Alternatives, Cambridge, MA The MIT Press, (p.17)2 Baumol, W J (1988) Economics Principles and Policy, Ch.29, The market mechanism Shortcomings and remedies (p631-51)3 Wolf, C Jr (1993) Markets or Governments Choosing between Imperfect Alternatives, Cambridge, MA The MIT Press, Ch 4