Can governments correct market failures? Essay

Whatever economic system a rural adopts, on that rank is always a role for the politics due to grocery store failures. Can disposals sort trade failures? Illustrate your answers with example.Part one raptus Smith who proclaimed the principle of the invisible hand that holds every someone is led, as if by an invisible hand, to achieve selfishly the best nice for all. Smith saw unanimity between private sign on and globe interest. In his view, any governance interference with free competition is some certain to be injurious in the economic world. He accept that the virtues of the marketplace mechanism be fully realized only when the checks and balances of am peculiarity competition argon present.Under the perfect competition and with no market failures, markets will squeeze as many useful goods and services by of the available resources as is accomplishable. However, in reality, markets whitethorn fail to function rise under numerous reasons. According to Wolf 1, in that location are two kinds of failures which are i) insufficient allocation of resources in terms of the quality of products and prices and ii) inequitable dissemination of income or wealth. To be much(prenominal) specific, it includes the following the inability to provide ordinary goods, negative externalities, light discipline and increasing returns to scale and monopoly.Public GoodsA humankind good is a commodity or service whose benefits are not depleted by an additional user, and for which it is generally voiceless or impossible to exclude people from its benefits, even if they are unwilling to bear for them. In contrast, a private good is characterized by twain excludability and depletability 2. whatsoever examples of cosmos goods are provision of national defense, the building of highway entanglement or the support of basic science. Adequate private product of these public goods will not occur as the benefits are so widely dispersed across the populati on that no single firm or consumer has an economic inducement to provide them. Since private provision of public goods is insufficient, establishment must step in to provide public goods.PA302 (1) CHAN Sau-fung (S05012153)ExternalityThis is some other type of inefficiency arises when there are spillovers or externalities. These effects occur when firms or people impose be or benefits on others outside the marketplace. The phenomenon of externalities is universal. Since our corporation has become more densely populated and as the volume of production of energy and other material increases, negative spillover effects will be generated. This is where establishments come in. Government standons are designed to control externalities like line of business and water pollution, hazardous wastes, unsafe drugs and etc. continuous tense InformationIt is escapist to assume that holdrs/sellers and consumers/buyers to film all information before they make their decisions. In reality, producers, providers or sellers have more information about their products than their customers. The decision doings of customers, to a certain extent, is relying on the information they obtain from their fri give ups or gage media. An optimal decision empennage 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 comfort consumers.Increasing Returns to scaleIncreasing returns to scale arise when a equilibrate increase in all inputs leads to a more-than-proportional increase in the take aim of output. 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 eventually produce decreasing returns to scale.Monopoly sodding(a) competition in a market arises when there is a sufficient number of firms or d egree of rivalry such(prenominal) that no one firm can affect the price of that good. Imperfect competition, on the other hand, is a serious deviation from perfect competition. An imperfect competitor 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 provider who determines alone the price of a particular good. Monopoly advocator leads to prices that rise higher up cost and consumer purchases that are reduced below efficient levels. The pattern of to a fault high price and too low output is the hallmark of the inefficiencies associated with monopoly power. In some cases, the government has to take steps to curb monopoly power. The government regulates the prices and net profit of monopolies, as is now the case for local utilities.Part Two hitherto though the market mechanism is an admirable way of producing and allocating goods, sometimes market failures lead to deficiencies in the economic outcomes. Government steps in to correct these failures in ramble to make the economy function more efficiency, withstand the equitably and to promote economic growth and stability.Direct RegulationsDirect regulation is where most of a good people are allowed to use is without delay limited by government. The purpose of the regulations is to stabilize the course of the national economy. For instance, governments strain to correct monopoly and pollution (externalities) to encourage efficiency by introducing legal antimonopoly constraints on business behavior or antipollution laws. motivator PoliciesIncentive programs are more efficient than direct regulatory policies. The two types of inducement policies are either taxes or market incentives. A tax incentive program uses a tax to redistribute income so as to diminish the situation of unacceptable inequalities of income and wealth. In fact, the tax often yields the desired end more efficiently than straight reg ulation as this solution embodies a measure of fairness about it, i.e. the person who conserves the most pays the least tax.An alternative 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 un trading rate, the government introduces monetary policies, hence, the changes in money interpret and interest rateswith a view to stabilizing through macroeconomic policies. Or, during sloweconomic growth, the government will reduce budget shortage and raise national savings rate in order to defecate 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 pursuing the macroeconomic objectives of economic growth and stability. However, in reality, government treatment does not allow fine-tuning, and when the problems change, the government solution often responds 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 worse that if it did not intervene at all. This is what we resound non-market failures, i.e. government failure. Due to the difference in demand and preparation in government, its bureaucratic structure, the step in of the government may cause more harmful 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 explore possible ways to i mprove its efficiency. The sometimes inherently inconsistent objectives or phantasmagoric goals may alike lead further inefficiency. As there is no competition, 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 insure the issue in an efficient manner.PA302 (1) CHAN Sau-fung (S05012153)Cost ineffectivenessThe government sectors have its own internal 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(a) 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 g overnment agencies to maximise 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 amount in the succeeding(a) year. In this connection, government agencies would privilege to invest their money in more advanced technological systems and cares very little about a newer engine room really works or is cost effective or not.For example, they would prefer to invest money in national defence, the most advanced ordnance systems rather than other more useful purposes that will bring inviolable benefits to public. Moreover, most of the government sectors such as the foreign affairs and light agencies wish 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 fai lure, it may shit unintended or unanticipated 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 damage HKs come across 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 avail to disadvantaged groups.Distributional inequityPA302 (1) CHAN Sau-fung (S05012153) food 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 privilege. As an extreme example illustrated by Wolf, in communist society, the government correct inequity crea te 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 government 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 enable then to take on global competition. And, at the same time, it helps to protect our labour and head off 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 only when on the one who runs the g overnment.Reference1. Market failures http//elmo.shore.ctc.edu/economics/market.htm2. Government form _or_ system of government & 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