Thrtil and Prtil Diffiultis Invlvd in th Fr-mrkt nd th Rgultry Slutin - Case Study Example

Thеоrеtiсаl and рrасtiсаl diffiсultiеs invоlvеd in thе frее-mаrkеt аnd thе rеgulаtоry sоlutiоn Name Instructor Date Explanation of the theoretical and practical difficulties involved in the free-market The free market is an economic system whereby there is the absence of government intervention in setting the price of goods and the forces of demand and supply operate freely. A completely free market is a market economy where buyers and sellers transact freely on a mutual agreement on price. There is no presence of state intervention in any form of taxes, regulation and subsidies. In this market economy, the prices of goods and services are set freely by consent between the buyer and seller. Individuals exercise freedom of choice since they are free to buy and sell their products in a market of their choice. Allocation of resources occurs through a market mechanism where the way resources are used is considered to be the most beneficial. Consumers are considered to be sovereign rulers; they decide on what and how much to be produced and at what price. There are various theoretical and practical difficulties involved in free market First, in a free market, multinationals corporations and conglomerates (MNC’s) run the better part of economic activities. Their aim is to maximize profits as opposed to serving the citizenry. Free market advocates argue that capital should be allowed to shift around the world without being hampered by government regulation, while responding to the same supply and demand forces that drive global business in manufactured goods. As a result, negative externalities occur such as the use of modern technology in production which releases effluent to rivers, smoke to the environment, and emission of dangerous gases that endanger lives. Those multinational corporations rarely provide social amenities such as schools, hospitals, and roads. The result is under-development and inefficient allocation of resources (Baumol, 2015) There are practical difficulties of free markets such as exploitation of labour in the developing world. International Monetary Fund (IMF) was in the forefront of advocating for free markets for six decades until 2008 when there was a financial crisis that hit whole world. Investors (multi-national companies) spotted opportunities in the labour-rich and poor capital in those countries. They moved there when they sense profits, and freed when they lost interest, leading to mass unemployment and disregard of the public welfare of the citizens. IMF admitted that developing countries will benefit from controlling the amount of foreign capital that enters its economy, how to use it, and how much leaves (Murphey, 2010). Another difficult of free markets is inflation or the exchange rate instability. Countries with volatile currencies are advised to control capital inflows, so as to guard against the balance of payment deterioration and the high debt levels. They have to differentiate between the safer foreign direct investment and the risk prone short-term foreign currency debt. For example, it happened in East Asian countries in 1998 where capital inflows in Thailand, Indonesia, Malaysia and South Korea when it came to a sudden halt. Across that region the interest on debts rose, the stock prices dropped rapidly, and most economies fell (Murphey, 2010). Gallagher (2004) points out that free market will lead to wealth inequalities, thus contribute to the unequal distribution of resources within the country. The rich will acquire a lot of resources than the poor thus creates a wider gap between the two groups. Wealth inequalities will lead to a social problem because the poor will indulge themselves in bad activities such as drug abuse, unfair labor conditions, racism, and violence in schools. The free market economy may not produce public goods. Public goods are those commodities characterized by non-rivalry and non-excludability. Public goods provided by the government for example roads, schools, highways and national defenses, street lighting, public hospitals, public defense, street lights, and police service. Corporates will tend to demand and to supply certain goods and services that are not beneficial to the general public but produce only private goods that will maximize their interest. Free market leads to the development of monopoly. Monopoly is where there is a single source of supply and the product produced does not have a close substitute (Aikins, 2009). These firms enjoy abnormal profits because they can sell goods at the highest price. Free market economy contributes to the negative externality. A negative externality is an occurrence of an economic activity that imposes a negative effect on an unrelated third party. If an item has a negative externality, then its cost to the public is greater than the cost the customer is paying for it. Since customers make a choice based on where their marginal cost equals their marginal benefit, if a negative externality occurs, manufacturers fail to take accountability for external costs that exist. These are passed on to the public. The negative externality occurs where firms or individuals make a decision based on direct cost and ignores the indirect cost of the likely pollution harm, as long as they will maximize their profits (Aikins, 2009). The regulatory solutions proposed to address the problems of global environmental degradation The adoption of free markets has a close impact to environmental degradation through both positive externalities and negative externalities. Open trade leads to raised living standards thus leading to a cleaner environment. Environment and free markets can be complementary rather than contradictory. Most negative externalities relate to environmental degradation and consequences. Free markets economy have led to industrialization, urbanization, deforestation, high standards of living and increased population. All those have fueled global environmental degradation. In a free market economy, factory and business owners have to produce and sell more to maximize profits. This core nature of free markets has resulted in substantial depletion, pollution and poor waste management. Global environmental degradation refers to changes in environmental balance perceived to be undesirable. It is the pollution of our planet (air, water, and land), depletion of resources and accumulation of waste in the wrong places (Heath, 2006). According to Aikins (2009), among the regulatory solutions proposed to address the problems of global environmental degradation are government interventions. Corporate social responsibility should be compulsory. Rules and regulations regarding the environmental pollution should be mandatory. Environmental rules and regulations relating to pollution should be enforced using fine that is a tax imposed if pollution rises above a particular prescribed threshold. The government should also introduce quotas on pollution which can take effect through tradeable emission permits. Each company must take care of its environment i.e. pollution control, waste disposal and good housekeeping policies. The government should ensure that there is appropriate legal action to be taken if any private firm goes against the public interest. Another regulatory solution is pollution control and remediation. Sources of authority for those laws are international treaties such as comprehensive test ban treaty, the Kyoto Protocol, Montreal Protocol, and non-proliferation treaty. Most of those treaties pertain to reducing greenhouse emissions, prohibiting hunting of endangered species, and banning the testing of atomic bombs. It is the role of government to continue to create and enforce antipollution laws as well as provide tax incentives and stiff penalties for firms and industry to decrease their pollution. Environmental protection agencies should be well funded to carry this role. The government should introduce taxes and tariffs on pollution (green tax shift). In a quest to lower pollution industries should be financed to conduct research on decreasing their pollution. (Gore, 2000, p. 320). To decrease carbon dioxide emissions, we should use of railway transport in large cities and encourage people to avoid offices and work within their homes. Other efforts are to control the destruction of forests and place high regulation standards on carbon emissions among industries. Regulations to guard against depletion of resources due to global environmental degradation have been proposed. They include recycling the resources that we have already used natural resources. The government should give tax incentives to firms and industries that want to go to a recycling business for the first time. The use of alternative and environmentally friendly sources of energy such as the sun, the wind, and water power, instead of relying on coal and oil is also being highly advocated. Reduced use of oil and coal will help to curb acid rain and global warming. Regulatory solutions concerning waste control and management have been proposed. Solid waste reduction efforts such as reusing, buying recycled items, and choosing items in less packaging is in use in many places. New research should give a lead to new ways to decrease waste and market waste among industries. Companies are being encouraged to decrease waste, store it safely or recycle it. In developed countries, companies are given tax breaks to do their research on reducing environmental degradation. Industries in production should change the way they produce goods so that we reduce the overall waste thus reducing pollution. Reducing waste and recycling it, reduce methane emissions and save energy. Burning solid waste using incinerators is advisable, but it is not the best since it pollutes air through poisonous substances emissions (Heath, 2006). Reduction of greenhouse gases and use of ecotax are other regulations. Regulation on the reduction of greenhouse gases emissions such as carbon dioxide, methane, nitrous oxide, ozone and water vapour are vital in the corporate world. Those gases lead to global warming, climatic changes, rising ocean levels, and desertification. Those regulations include increasing the use of renewable energy, cutting down emissions, and improving energy use efficiency. Ecotax is used to make sure the party responsible for polluting environment pay the damage (polluter pays principle). It addresses the failure of free markets to put in mind the environmental impacts of their actions. Broadening stakeholder engagement is another vital regulation. The private institutions and other relevant stakeholders should be involved by governments to explore the use of new information, new initiatives, and communications technology to build a stakeholders network. Thus enhance access to information, stakeholder engagement, and mobilize new partnerships. An inter-generational assembly could provide an opportunity for future leaders and sustainability champions to interact and foster a joint vision in global environmental degradation. Initiatives to consider in this will include participating in local environmental events, starting a recycling competition at the workplace and sharing a commitment to the environment on social networking sites. Implementing Sustainable Development (Agenda 21) is another regulation, although it is a legally non-binding statement of intent and not a treaty. Businesses and industries should consider the long term, what is good for the global community, and what is good for future generations if we want to survive as a species, in their daily running. They should pursue development that meets the need of the present without compromising the ability of future generations to meet their needs (Fredriksson, 1999). They should see the world as an interdependent system over space, and understand that pollution in one continent will affect air quality in another continent. The likely social and economic impacts of implementation of these solutions If the government does not allow the free market to operate freely without its intervention, this will discourage investors both local and foreign leading to a negative impact on economic conditions of the country. On the other hand, too much freedom for corporate owners will lead to exploitation, pollution and corrupt deals. The government should strike a balance and know how to create an enabling and just business environment. It should not be seen to distort, correct, or inhibit the market mechanisms whose main driver is demand and supply forces (Baumol, 2015). Controlled pollution and remediation will improve the general well-being of cities and improve standards of living, eliminate the discharge of the toxic pollutant to rivers, and reduce emissions to the atmosphere thus reducing global warming. It will also ensure the country involved adheres to the international protocols and treaties governing environment (e.g. Kyoto Protocol) and reduce infections associated with pollutions. On the negative side, this will increase the cost of operating business thus reducing revenues. If the environmental regulatory controls are too harsh, they may scare away potential investors. Regulations to guard against depletion of resources and waste control and management will maximize resources utilization, preserve natural resources, promote the use of safer energy, and lead to better solid waste management. Production efficiency will increase, reduce greenhouse gases emissions, and promote research advancement. Among the negative impacts is the increase in running costs especially in production, and also it may slow down the production processes as companies search for renewable energy. Reduction of greenhouse gases emissions will reduce unexpected climatic changes, reduce global warming, cut down pollution, improve the ecosystem, reduce desertification, and avoid rises in sea levels. The use of ecotax will ensure corporates acts with due diligence while carrying out their activities, they pay for what they pollute and discourage environmentally degrading activities. If the ecotax is too punitive, it may discourage investors in particular sectors of the economy. Reduction of greenhouse gases comes at a cost and might proof to be an uphill task for small firms (Gallagher, 2004). Broadening stakeholder engagement and implementing Sustainable Development (Agenda 21), are pro-active approaches. Stakeholder engagement leads to reduced resistance to implementing environmental changes, adherence to the rules and active participation. Implementation of sustainable development will safeguard the environment against current or foreseeable risks in the future. Application of those two approaches calls for concerted efforts from all the parties involved which may be difficult to attain. Sustainable development may have little or no impact since it is not a treaty, but rather a voluntary action plan (Fredriksson, 1999). In conclusion, there is need to come up with global agenda concerning free markets impacts on environmental degradation. In so doing we ought to outline the goals, lay down what is required to be accomplished and how to accomplish it. Governments should formulate and enact proper environmental laws that will protect the environment and impose penalties on injured parties. Those laws should also punish business executives who allow their companies to pollute, misuse, and deplete environmental resources. List of references Aikins, S. K. 2009, “Political economy of government intervention in the free market system”, Administrative Theory & Praxis, Vol.31 No.3, pp. 403-408. Baumol, W., & Blinder, A. 2015, Microeconomics: Principles and Policy, Cengage Learning. Fredriksson, P. 1999, Trade, global policy, and the environment (Vol. 402), World Bank Publications. Gallagher, K. 2004, Free Trade & the Environment: Mexico, NAFTA, and Beyond, Stanford University Press. Heath, Y., & Gifford, R. 2006, “Free-market ideology and environmental degradation the case of belief in global climate change”, Environment and Behavior, Vol. 38 No.1, pp. 48-71. Murphey, D. D. 2010, “Freefall: America, Free Markets, the Sinking of the World Economy”, The Journal of Social, Political, and Economic Studies, Vol. 35 No.2 p. 255. Read More