Market Failure is a More Significant Problem than Government Failure - Example

Market Failure is a More Significant Problem than Government Failure Student’s Name Course Professor’s Name University City (State) Date Market Failure is a More Significant Problem than Government Failure 1.0 Introduction Market failure is a condition in which the services and goods allocation is inefficient. In explanation, it is when there is another possible outcome in which all the people would gain thus no losers. Market failure can be considered as a situation in which the market players are extremely selfish thus making it not efficient (Randall 1983). The situation should seem possible to rectify on the point of view of the society. It can also be defined as a situation in which the free market’s resources are not allocated efficiently. On the other hand, government failure is when the government’s intervention aimed at solving the market failures fails to achieve the societal efficient resource allocation. In explanation, government failure is a situation in which the attempt by the government to rectify the market failure ends up creating inefficiency thus scarce resource misallocation (Le Grand 1991). The aim of the paper is to show that market failure is a more significant problem compared to the government failure. 2.0 Understanding Market Failure Market failure can be understood through the analysis of types of the market failure. In explanation, the types of the market failure will assist in the identification of the impacts and significance of the market failure (Zerbe & McCurdy 1999). Furthermore, identification of the remedies can also help determine the significance of the market failure. 2.1 Types of Market Failure Market failure can be of different types. First, market failure can be due to inefficiency. That is, it can be caused due to the failure of the markets to allocate and produce the scarce resources in the efficient manner possible. Second, market failure can be caused by monopolistic powers in the market. In explanation, failure to control the monopolistic powers might lead to abuses in the market. Third, there might be a failure in the formation of markets thus the want or need not being able to be addressed. Such failure is common among the public goods such as highways, street lighting, and defence (Randall 1983). Market failure might also be due to the incomplete markets thus failure to produce sufficient merit goods like healthcare and education. Furthermore, markets might de-merit goods as they fail to regulate the sale and manufacture of goods such as alcohol and cigarettes that have less merit than the perception of the consumers. Negative externalities might also lead to market failure. In explanation, the producers and consumers may fail to take into consideration the effects they cause to the third parties who include communities, organizations, and individuals. As a result, the third parties might suffer or benefit indirectly due to the selfish actions of the producers and consumers. Market failure can also be due to failure to appropriately give property rights thus inhibiting the formation of markets (Zerbe & McCurdy 1999). In addition, failure to provide sufficient information in the market transaction can lead to inadequacies. Furthermore, instability in some markets such as credit markets, foreign exchange, and agricultural markets might be so volatile and need intervention. Lastly, inequality among income earners in the market might see the market transaction rewards only a few producers and consumers thus causing inadequacies. 2.2 Remedies for Market Failure Market failures can majorly be rectified through the actions of the government. There are two strategies that the government can deploy to address market failure. First, the government can eliminate the market failures through the price mechanism technique (Stiglitz 2008). In explanation, it can develop and implement policies seeking to change the producers' and consumers' behaviour through the price mechanism. For instance, the price of products deemed harmful can be highly taxed thus increasing their prices while the ones deemed beneficial can be given financial incentive thus reducing their prices (Cowen1992). The concept, therefore, uses financial incentives to change behaviours. The use of incentive works the same way with how markets allocate resources. Second, the government might use force and legislation to rectify the market failure. In explanation, it can use the legal framework to change the behaviour of players in the market. For instance, the unwanted behaviour can be controlled through regulations that call for actions such as penalising of the polluters, licensing for the alcohol sale, and banning cars from entering the city. However, the combination of remedies is the most appropriate way of handling market failure. 3.0 Understanding Government Failure Even though the government can correct the market failure, its activities might fail. In explanation, the attempts of the government to address market failure might lead to misallocation of resources and inefficiency. There are varied examples under which government may fail. The examples market efficient below. 3.1 Government Failure Incidences Government’s attempt to rectify the market failure can be of varied types. First, the subsidies offered by the government can cause market inadequacies. In explanation, the inefficient firm that benefits from the subsidies may be deemed protected thus creating barriers to new firms into the market as the prices are low. Other assistances including subsidies can lead to moral hazard in the market (Le Grand 1991). Second, taxation of services and goods can artificially raise the prices of goods and affect the market operations. Furthermore, income taxes can discourage employees from working hard due to disincentive effect. Third, the government can attempt to create efficiency in the markets through the development of fix prices that dictate the maximum and minimum prices. Such an act can lead to shortages in the market when the price fixed is less than the market price. For example, issuance of free healthcare will reduce the number of businesses offering the services thus increase in demand. On the other hand, surpluses can arise when the government fixes the prices above the market rate since the supply will be more than demand. For instance, when the farmers are guaranteed high prices for their products, they might engage in overproduction thus wasteful surpluses. Another example of government failure is based on inadequate information on the part of the government (Stiglitz 2008). Some economists have argued that government might fail to have adequate information relating to the market. As a result, the decisions that the government will make decisions that might lead to inadequate allocation of resources. Several economists argue in the support of the efficient market hypothesis. The hypothesis argues that no entity, individual, or government can fully understand the market. It, therefore, calls for non-interference of the market movements and prices since governments or individuals cannot improve the markets. Government failure can also be due to excessive bureaucracy which might be caused by the attempt of the public sector in solving the main agent problem. It is, therefore, important that the government appoint bureaucrats to oversee the activities of the organisations in the public sector. Lastly, welfare benefits payment can lead to moral hazard. In explanation, when the individuals are aware that the state provides poor health treatment or unemployment benefits, they make less effort in preventing poor health practices such as smoking and poor diet or in taking steps in improving their employability respectively. 3.2 Remedies for Government Failure There are several processes that the government can put in place to avoid failure in the public sector. First, the government can introduce performance targets and profit incentives in the public sector. For instance, schools should be given minimum exam standards to see they improve in performance. People in the public sector can also be paid per day rather than per hour so as to ensure that time is not wasted in expectation of additional wages. However, it might be difficult for the profit motive be introduced to the public offices (Stiglitz 2008). For instance, health care and education are not influenced by the profit motives and performance targets. Another challenge might be that schools might engage in malpractices such as admitting on the intelligent students while locking the rest out as a way to improve performance in the main exams. They might engage in sacrificial practices with the intention of getting better results. The hospital managers might manage to cut costs, but that will not be effective since the only efficient way is putting pressure on the doctors and nurses which might compromise the healthcare standards. The challenge is that the government involvement in the public service is majorly through the provision of under-provided and free market goods such as the public and merit goods. In explanation, such goods are not provided through industries that are naturally profit oriented thus hard to regulate. Second, the government should introduce competition mechanism in the public sector so as to promote efficiency (Le Grand 1991). For instance, the government should allow for competitive tendering in the public service. As a result, the local councils will lose the monopoly they enjoy in the provision of public services such as collection of refuse and offering of school meals. As the private sector competes with the public entity, often the former will be winning thus challenging the latter to adjust. In explanation, competition threats develop incentives that make the public sector imitate the private companies and engage in cost reductions. However, under competitive tendering, it does not mean that the cheapest service is the best. The cost can be reduced at the expense of quality reduction thus inefficient. It is, therefore, important to check the service standards during tendering. The challenge is the introduction of competition in the conventional public sector which is a natural monopoly. In addition, awarding of tenders come with some element of monopoly too. For instance, if a private entity wins the tender of collecting the refuse for five years it will mean that they are in monopoly business for that period of time. Lastly, the government failure can be eliminated through the introduction of public-private partnerships. As a result, the two sectors will counter check each other thus promoting productivity through the reduction of malpractices. The private sector might bring in resources such as human capital and funds to the project while the government does only the coordination and planning role. However, the partnership usually has the private sectors as the winners since they end getting the profit while the governments get nothing. The a will be using the investments of the government yet giving nothing in return apart from the provision of services. 4.4 Analysing the Significance of Market and Government Failure. Market failure is when the private sector fails to perform effectively or efficiently. The solution under such circumstance is normally considered to be the intervention of the government in most scenarios which include the introduction of taxes and incentives to reverse the problem (Zerbe & McCurdy 1999). Even though the process used to identify market failure might be appropriate, the call for the involvement of the government is not appropriate. In most instances, the government is run by political thinking as opposed to economic thus making it the wrong player to offer a solution for the market failure (Randall 1983). It is, therefore, important to consider the government policies before recommending its solutions. In explanation, the government policies can either worsen or improve the outcomes of the private sector. The government might be less informed, but its decisions, and mistakes might greatly affect the market. Monopolies can exist in both the private and public sector with the former having great significance. In explanation, the private sector monopolies include the Microsoft that has a monopoly over the computer operating systems (Stiglitz 2008). International Business Machines Corporations was also a monopoly when they were in control of computers. Another form of monopoly that can be experienced in the private sector is when the entities form cartels that aim at raising the prices of the goods and services through restricting production (Cowen1992). The duopoly position of the government such as postal services or oil companies restricts the private sectors in entering the market (Zerbe & McCurdy 1999). In explanation, public monopolies either delay or prevent the private companies from entering the market. The advantage of the public monopolies is that their goods are often of fair price since they do not focus on profit but services and goods offered. The public monopoly might, therefore, be relatively permanent compared to those of the private sector due to the difference in prices charged and profit margin. Government actions might have a greater influence on the market (Stiglitz 2008). It might either fail to address the market failure or worsen it. For instance, in the United States, a quasi-governmental entity was developed to address mortgage concerns in the residential housing industry on the argument that the private sector was issuing insufficient mortgages more so to the families with lower income (Le Grand 1991). The entity caused inefficiency in the market as it insured risks in excessively. Another example is the regulations set by the European government that attacks mainly the American companies such as Intel, General Electric, Google, and Microsoft based on the argument of protecting the domestic industries (Cowen1992). At this point, the government is protecting the rival companies or jobs at the expense of the quality of services issued in the market. Another example of the government failure can be seen in the energy sectors. Several countries have subsidized the prices of electric batteries, biofuels, solar, and the wind because of the pollution rate caused by the use of fossil fuels such as oil and coal. However, the choices on the subsidy are made on the political as opposed to economic criteria (Zerbe & McCurdy 1999). For instance, hydrogen cars were most preferred t a given point as the substitute of the gasoline motor vehicles just to fall out of favour to be replaced by the electric cars. Government actions should only come to play when the market failures are persistent and large. As a result, the market failure will be the determinant of the government failure since the occurrence of the former dictates the one of the latter (Le Grand 1991). However, the government should focus on the police and military, judiciary, protecting against pollution, and protecting the marginalised and minority in the society (Cowen1992). It should be minimal in cases where the market failures seem to be temporary and relatively small as in the case of monopoly situations. The market is, therefore, more important and should be left to ruin itself. The government should not interfere with the market unless the failures are so critical and seem to be permanent. 5.0 Conclusion Market failure is significant than the government failure since the former are driven by the market forces such as profit as opposed to the latter. The former, therefore, might have adverse impacts on the economy of the country as opposed to the latter. In addition, the government services are not governed by the profit issues thus making the failure, not of great impact. It is also important to understand that the market failure supersedes the government failure. In explanation, market failure means that the situation has already deteriorated, and there is no economic efficiency in the market. The government failure, on the other hand, aims at rectifying the situation. The failure on the part of the government would, therefore, be less significant compared to the market failure since the situation is already in a bad condition. Furthermore, the market failure mostly affects the private sector that relies on profits. The private sectors are also the major source of services and goods in the market. Therefore, when they are negatively affected, they will withdraw from the market thus impacting greatly the economic capability of the market. The fact that market failure also depends on the decisions made on by the government makes it more significant. For instance, market failure can be due to the government failure thus of much importance and influence compared to government failure. In other words, government failure is an element of the market failure. It is the market failure that introduced government failures into play. In the absence of market failure, the government will not come into play thus making the former more significant. It is also important to note that monopolies in the private sector are of much impact compared to the one in the public sector since the former is driven by profit while the latter is much into the quality of services. As a result, many people are likely to suffer when a monopolistic entity is private as opposed to when it is public. The impact of the public monopolies is much experienced among the private entities that were opting to get into the market and not the consumers. Market failure is, therefore, far more damaging and pervasive since it dictated the possibility of occurrence of government failure. However, it is self-correcting and should be given time to adjust to the optimal levels. Reference List Cowen, T 1992, Public goods and market failures: A critical examination, Transaction Publishers, New Jersey. Le Grand, J 1991, ‘The theory of government failure,’ British Journal of Political Science, vol. 21, no. 4, pp.423-442. Randall, A 1983, ‘Problem of market failure’, The Natural Resources J., Vol. 23, pp. 131-148. Stiglitz, JE 2008, Government failure vs. market failure: Principles of regulation. Available from: < http://academiccommons.columbia.edu/catalog/ac%3A126997 > Zerbe, RO & McCurdy, HE, 1999, ‘The failure of market failure,’ Journal of Policy Analysis and Management, vol. 18, no. 4, pp.558-578. Read More