Essay about Market Failures: Government Intervention
652 WordsOct 15th, 20113 Pages
September 27, 2010
BUS 345 Essay #1
What is the basis for the contention that governments should intervene to correct market failures? (Be sure to explain what market failures are and why they are significant without providing superficial, rote definitions.) Contrast this with the argument that laissez faire is preferable to intervention. (If possible, link this to the idea of government failure, the iron law of public policy, rent seeking, and unintended consequences.)
Imagine a grading rubric in which failure is considered everything except perfection. In the academic world this seems absurd but in economics whenever markets deviate from any of the ideal conditions necessary for perfect competition the result…show more content…
60) at an exponential rate. Those who favor government intervention see it as reclamation of control that the government once held over corporations that kept the interest of citizens and society ahead of the shareholder’s (Korten, 61-65).
Despite this incredible accumulation of power some still believe that government intervening on market transactions is a removal of freedom and can too easily lead to the sort of coercion seen in many communist states. Those who occupy this end of the spectrum argue that laissez faire maintains an efficient, innovative and mutually acceptable market system. They also contend that in general government intervention fails at implementing proper public policy to such an extent that they themselves produce a net social cost. For the most part, these government failures are not random. Perhaps the greatest cause for these miscarriages is human rent seeking which is when individuals exercise state power for the benefit of personal gain or that of special interest groups. This coincides with another cause for government failure referred to as the Iron Law of Public Policy. What this means is that by simply acting to benefit one party the government will inevitably deal out direct or indirect damage to another.
Market failure occurs due to inefficiency in the allocation of goods and services. A price mechanism fails to account for all of the costs and benefits involved when providing or consuming a specific good. When this happens, the market will not produce the supply of the good that is socially optimal it will be over or under produced.
In order to fully understand market failure, it is important to recognize the reasons why a market can fail. Due to the structure of markets, it is impossible for them to be perfect. As a result, most markets are not successful and require forms of intervention.
Reasons for market failure include:
Positive and negative externalities: an externality is an effect on a third party that is caused by the consumption or production of a good or service . A positive externality is a positive spillover that results from the consumption or production of a good or service. For example, although public education may only directly affect students and schools, an educated population may provide positive effects on society as a whole. A negative externality is a negative spillover effect on third parties. For example, secondhand smoke may negatively impact the health of people, even if they do not directly engage in smoking.
Environmental concerns: effects on the environment as important considerations as well as sustainable development.
Lack of public goods: public goods are goods where the total cost of production does not increase with the number of consumers. As an example of a public good, a lighthouse has a fixed cost of production that is the same, whether one ship or one hundred ships use its light. Public goods can be underproduced; there is little incentive, from a private standpoint, to provide a lighthouse because one can wait for someone else to provide it, and then use its light without incurring a cost. This problem - someone benefiting from resources or goods and services without paying for the cost of the benefit - is known as the free rider problem.
Underproduction of merit goods: a merit good is a private good that society believes is under consumed, often with positive externalities. For example, education, healthcare, and sports centers are considered merit goods.
Overprovision of demerit goods: a demerit good is a private good that society believes is over consumed, often with negative externalities. For example, cigarettes, alcohol, and prostitution are considered demerit goods.
Abuse of monopoly power: imperfect markets restrict output in an attempt to maximize profit.
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Related TopicsGoodsMarket failurePublic economicsWelfare economicsEnvironmental economicsDemerit goodMerit goodExternalityPublic goodMarketSpillover effectSocial cost
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