Market failure
In modern mixed-market economies, national strategy starts from the premise that a wide range of national objectives will be pursued through decentralized economic markets in which firms and consumers are relatively free to make informed decisions that influence their own welfare (1994). The rationale for government action results from market failures, in the sense that some distortion in information or incentive structures is producing the wrong signals for private actions, or from a desire to alter the distribution of income that results from private decisions. Judgments on what constitutes a market failure or an unacceptable distribution of income are obviously intensely political decisions, and those judgments and the extent and form of intervention to correct perceived failures differ substantially from country to country ( 1994). Given the formal defense, that the performance of a successfully functioning market cannot be improved on, economists derive one of the major classes of reasons for government intervention from what are called market failures. One form of market failure involves common property resources. Common property resources and economic theory show that, in market economies, common property resources such as fisheries, public grazing land, and forests will be over-exploited, often to the point of destruction ( 1994).
A major area of government activity is to regulate the use of common property resources. This can be done, for example, by creating property rights in the form of trade able quotas to exploit the resources. The total quota is set at the optimal level of exploitation and the individual quota units go to the highest bidders. With common property resources, the biggest problems facing governments lie not in figuring out what needs to be done but in having the courage to proclaim the solution and the ability to enforce it ( 1999). Another class of market failure comes from goods that, once produced, can be consumed by everyone and the consumption of which cannot be controlled. If everyone can use a publicly broadcast television signal, it is non-rivalrous. If its consumption cannot be prevented, it is non-appropriable. There is then no way for a private firm to produce the product for profit because the firm cannot make its use conditional on a payment. The state is the obvious producer of such public goods as police protection and national defense. It should be noted that, if consumption can be prevented, as with a fenced park, or if social conscience can be relied on, as with public television, a non-rivalrous good or service can be produced by private organizations ( 1999).
Markets work best when the same information is available to buyers and to sellers, so that they each have similar knowledge of what to expect from any bargain that they reach. Information asymmetries can lead to various market failures, of which adverse selection is but one example. Typically, individuals buying insurance know more about their exposure to risk than do the companies selling it. As a consequence, when the companies charge a rate that allows them to cover all their costs over all the policies they write, those buyers who are most exposed to risk will find the insurance a bargain, while those who are least exposed to risk will find the rate expensive. This alters people’s behavior over what would happen if the company could write a policy for each individual that adequately reflected that individual’s own risk exposure. Using the result that perfect competition leads to an optimum allocation of resources, many economists have argued that all deviations from perfect competition should be regarded as market failures (2002). Market failure happens because of monopoly in a country. One example of market failure from the Philippine settings is Manila Electric Company’s (Meralco) monopoly of electric power distribution in the whole of Metro Manila. Such monopoly created lesser opportunities for alternatives to put up their own electric power distribution business. The monopoly gave Meralco an opportunity to dictate prices without assuring the best service to clients. An example of market failure from the US setting is the monopoly of retail sales at military facilities by the Army & Air Force Exchange Service (AAFES). The AAFES’ monopolizes the sale of military products and equipment to internal and external entity. This gave AAFES some liberty to dictate the prices of equipment and create some discrepancies in its pricing strategies. One more country that encountered market failure due to instances of monopolies is Hong Kong. The economy of Hong Kong features state of monopoly. The monopolized sector of Hong Kong includes the Railway system. Hong Kong’s Railway system is controlled by MTR Corporation MTRC monopolized the railway system of Hong Kong and it made a different travel experience for Hong Kong people and tourist but it created monopolized pricing without assurance of better services.
Government Failure
The starting point for distinguishing between the market and the non market is that agents of the former derive their principal revenues from prices charged for output sold to purchasers who can choose whether to buy, what to buy, and from whom on the basis of their disposable resources. Non market organizations, whether close to the state or not, derive their revenues chiefly from taxes, fees, donations, or other contributions that are generally not directly linked to services rendered. Public policies designed to compensate for market shortcomings generally take the form of legislative or administrative assignment of particular functions to one or another Non market agent in order to produce the specified outputs that are expected to redress the market’s shortcomings. Such outputs can be regulatory services, pure public goods, quasi-public goods, and administering transfer payments (1998). Unlike private-sector not for profit organization, government and its agencies derive most of their revenue from mandatory taxes or user fees. These are provided simply by virtue of the fact that membership in that polity, to a large extent, is universal and compulsory ( 1998).
Government failures can encompass a wide array. First of all the information available to government may be seriously deficient and its perception and understanding of the consequences of any action it may take flawed. Government might then simply aggravate the error it is trying to correct. Second, governments do not have full control over their activities, although their authority is evidently more extensive than what is available to private agents. Barring an anarchic transition, the role of the state in reality will have to be much larger than the advocates of neo liberalism like to admit. Its central focus should be providing order to the transformation commensurate with the capabilities that the state has at its disposal or can quickly acquire ( 2001). The state can do so through various means, including by wielding its coercive prerogatives. But these are better used sparingly. Instead, policy makers should be concerned about actively promoting governance capabilities for the major tasks at hand. Aside from the humdrum aspects of presiding over the society, during the transformation these all revolve around the orderly destruction of assets in place that become superfluous in a market context and the encouragement, within a set framework, of creative activities, particularly through new small firms ( 2001).
When governance capabilities fall short of what is deemed necessary to maintain order in the transformation, it behooves those managing the transition and their advisers, as well as assistance-delivering agencies, to explore with determination ways and means of upgrading and extending governance capabilities. Only in this manner can a sociopolitical consensus be forged and sustained through the hobbled path leading toward the realization of the transition’s goals ( 2001). Sometimes, government fails in its roles, such as antitrust or consumer protection, to promote efficient market competition. This often happens as an accidental result of poor legal or administrative process. An especially expensive case of government failure involved the savings and loan (S&L) scandal of the US. The federal government and the states deregulated the S&L industry by allowing more entry, more S&L investments in real estate and other risky ventures, increasing federal insurance coverage on deposits, and allowing a sole person to own an S&L. The S&L lobby was understandably supportive. Any loss due to unprofitable or illegal S&L diversions would be covered by the federal government. Depositors were insured, so depositors had no incentive to make sure their deposits were being well spent. However, the federal government clearly did not look after the insured deposits either. They did not enforce the public trust in federally insured money (1996). An example of government failure in the Philippine setting is the cost overrun on the roads and infrastructure. Last August 2008 the country’s reported that there were around P33.50 billion of cost overruns from foreign funding for various infrastructure projects. This is a government failure because there was inefficient allocation of goods brought about by mismanagement. The cost overrun wasted the budget allocation of the country, and prevented the proper delivery of needed services. In the US setting an example of government failure is mismanagement. In 2005 the . wanted to rationalize its Farm Service Agency offices located in various parts of the country but due to lobbying and misinformation the plan of the USDA did not push through. If only the USDA managed to inform those involved about the plan and its benefits there would be lesser antagonist to the planned changes. The plan would have given better benefits to the country.
Government Intervention to market failure
Government intervention disrupts the smooth functioning of a free-market economy, thereby generating the need for additional corrective intervention. This vicious circle by which government-induced problems lead to a larger role for government will eventually push society toward socialism. The only way to halt this process is to resist the initial temptation to improve society through government action .In contrast to the doctrine of natural rights; utilitarianism provided a flexible and pragmatic basis for government intervention. Any reform resulting in favorable consequences for society as a whole was considered legitimate ( 1998). The government intervenes in market failure due to its duty to protect the interest of individual and business entities. One instance of government intervention due to market failure involves the United States and the rise of Gas Prices in 2005 to 2008. The US government intervened by implementing price control and introducing measures to conserve energy to reduce the use of oil and petroleum prices. After some time the prices of oil dropped in large amounts. The policies used by the US government did not contribute much to the drop in oil prices in the succeeding years. Another instance of government intervention due to market failure involves the Philippines and the rising rice prices of 2007 to 2008. The Philippine government intervened at the failing market by selling rice at lower prices and suspending the export of rice products. The Philippine government introduced rice products that have lower prices but can be considered to be of good quality. This gave little assistance to the failing market.
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