Government Failure

11 Key excerpts on "Government Failure"

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  eBook - ePub

  Economic Principles and Problems - A Pluralist Introduction

  Special Sale for Roskilde University Basic Course in Socio-Economics

  • Geoffrey Schneider(Author)
  • 2023(Publication Date)
  • Routledge

    (Publisher)

  Soft budget constraints occur when industries expect to be continuously bailed out and therefore have no incentive to become efficient or to avoid excessive risk. Example: Many economists worry that the bailout of large banks after the financial crisis of 2008 will result in banks expecting to be bailed out whenever a crisis hits, no matter how irresponsibly they behaved. Previous bailouts have encouraged banks to continue to engage in a larger proportion of risky investments than would otherwise be the case.

  Government Failure can be addressed in three ways. Laissez-faire advocates use Government Failure to argue for less government intervention, arguing that in most cases it is not possible for the government to be as efficient as the unregulated market. Keynesian economists advocate improving government intervention to reduce Government Failure, arguing that where market failures are pervasive and problematic government intervention is preferable to the consequences of market failure. Political economists tend to see government intervention as primarily reflecting the interests of the dominant classes, and they argue for a more extensive control of the government and the economy by democratic means.

  Eliminating or reducing Government Failure usually requires greater investment in salaries and resources for regulatory bodies, which in turn requires more tax revenue. Societies must therefore choose between investing more in government to better control market failures or living with the consequences of market failure and Government Failure.

  19.10 CONCLUSION

  As with so many issues, economists disagree on how to approach the issues of market failures and Government Failures. From a pro-corporate perspective espoused by conservative Austrian and mainstream economists

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  Understanding Business: Markets

  A Multidimensional Approach to the Market Economy

  • Vivek Suneja, Vivek Suneja(Authors)
  • 2005(Publication Date)
  • Routledge

    (Publisher)

  SECTION 4: MARKET FAILURE INTRODUCTION Markets are not infallible: they can fail to organise economic activity in a socially desirable fashion. Chapter 7, When markets fail by Sloman and Sutcliffe explores the various sources and dimensions of market failure. Markets may fail to generate socially efficient outcomes and may fail to deliver equitable outcomes. Various factors may lead to social inefficiencies, these include: externalities; public goods; the behaviour of monopolies and oligopolies; ‘inappropriate’ consumer preferences; lack of information; uncertainty; and the immobility of factors of production. Inequitable outcomes may be generated by an inequitable initial distribution of resources, unequal access to career advancing opportunities or an unequal distribution of bargaining power. Sloman and Sutcliffe investigate whether and how some of these market failures can be remedied, and what role the government can play in this process. The state may potentially use a wide array of instruments to correct market failure, such as the use of taxes and subsidies, provision of missing information, the creation or alteration of property rights, the establishment of laws and bodies to regulate economic behaviour and the direct provision of certain goods and services. State intervention is not without its problems though. Just as markets can fail, so can governments. ‘Government Failure’ may be caused by a range of factors, such as the costs involved in gathering the required information, the inefficiency that may result due to lack of market incentives and the absence of adequate accountability. In recent years, many countries have reduced the degree of state intervention in their economies as a consequence of such considerations. They have also experimented with newer forms of state intervention, such as trying to regulate the production of certain goods and services rather than providing them directly through public enterprises

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  eBook - ePub

  The Politically Incorrect Guide to Economics

  • Thomas J. DiLorenzo(Author)
  • 2022(Publication Date)
  • Regnery

    (Publisher)

  The Economics of Government Failure

  F or most of the twentieth century, the economics profession was obsessed with the nirvana fallacy and invented innumerous theories of “market failure.” The analysis was always accompanied by recommendations for taxation, regulation, government subsidies, government mandates, price controls, or other forms of government interventionism and central planning to fix supposed market failure problems. It was simply assumed that government bureaucrats, instructed and funded by the not-so-invisible-hands of politicians, would be, well, perfect. Perfect politicians and bureaucrats would fix the problems created by imperfect markets—in other words, the behavior of people like yourself and your author.

  Beginning in the late 1950s and 1960s a group of economists, many associated with the University of Chicago, began to revive the limited-constitutional-government thinking of the American founders as it applied to economic analysis. They invented a whole new subdiscipline called “public choice” which was essentially the application of economic theory and methodology to the study of political decision-making.1 The topics they researched and wrote about were traditional political science topics—elections, lobbying, special-interest groups, bureaucracy, and so forth—but the methodology was from the field of economics.

  A man who leaves the business world and is elected to public office does not sprout an angel’s halo and become a virtual Mother Teresa; nor does he grow devil’s horns and necessarily become corrupt or incompetent. Like everyone else, politicians want to keep their jobs, get promoted to higher offices, and generally prosper. This motivation guides their behavior, says public choice analysis. The result is that while government may do many things that benefit the general public (maintaining law and order, defending against foreign invaders, enforcing the rule of law, and the like), there are also many reasons that Government Failure

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  eBook - ePub

  Recharting the History of Economic Thought

  • Kevin Deane, Elisa van Waeyenberge(Authors)
  • 2020(Publication Date)
  • Bloomsbury Academic

    (Publisher)

  Market failure refers to a situation whereby the market fails to allocate resources efficiently. Cases of market failure include provision of public goods, lack of property rights, abuse of market power, asymmetry of information, and externalities. State intervention via taxes, regulations, and subsidies is required to tackle those failures and to ensure an efficient allocation of resources. One typical example used in the standard mainstream textbook to illustrate market failure is national defence system as a public good. Once provided all residents benefit from it whether or not they are willing to pay for it (Mankiw and Taylor, 2014; Greenlaw and Taylor, 2017). Another example is market failure arising from the abuse of market power where a monopoly (single seller) or a monopsony (single buyer) can influence prices or output. This type of market failure is typically addressed by antitrust law (also known as competition law) which aims to penalise anti-competitive behaviour. Asymmetric information is another instance that gives rise to market failure and occurs when one party to a contract has more information than the other party, providing an advantage to the former. A well-known example of this type of market failure is the case of car selling (see Akerlof, 1970). Unlike the salesperson, the buyer is likely to have limited knowledge about the vehicle (e.g. service history, past accidents, reliability). In this scenario, market failure occurs when the buyer pays more than the car is worth. A fourth example of market failure is negative externalities, that is the negative effect of a particular economic activity such as pollution, on a third party (see Chapter 14). In the presence of such externalities, the social cost is not covered by the private cost, and in order to correct for that a tax should be imposed on the activity in question

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  Economic Perspectives on Government

  • Keith Dowding, Brad R. Taylor(Authors)
  • 2019(Publication Date)
  • Palgrave Pivot

    (Publisher)

  © The Author(s) 2020

  Keith Dowding and

  Brad R. Taylor

  Economic Perspectives on Government Foundations of Government and Public Administration https://doi.org/10.1007/978-3-030-19707-0_2

  Begin Abstract

  2. Markets, Market Failure and the Role of Government

  Keith Dowding

  1   

  and

  Brad R. Taylor

  2   

  (1) School of Politics and International Relations, Australian National University, Canberra, ACT, Australia

  (2) School of Commerce, University of Southern Queensland, Springfield, QLD, Australia

   

   

  Keith Dowding  (Corresponding author)

  Email: [email protected]

    Brad R. Taylor

  Email: [email protected]

  Abstract

  This chapter introduces Pareto efficiency as the key normative concept of welfare economics and describes the conditions under which we expect efficiency or market failure. We pay particular attention to the existence of externalities and show how these can, but do not always, cause markets to fail. Whenever there is market failure it is conceptually possible for government to intervene in order to improve outcomes. Government Failure also occurs, however, and so such intervention is not always practical. When considering imperfect alternatives, we must engage in comparative institutional analysis.

  Keywords

  Pareto efficiency Market competition Market failure Externalities Government Failure Coase theorem Monopoly Asymmetric information

  End Abstract

  The Invisible Hand and Market Efficiency

  A good deal of economic theory is positive—it attempts to explain and predict economic and social outcomes based on the rational choice assumptions outlined in the previous chapter. Economics also has a normative purpose, however, and economists have developed the concept of efficiency as a tool to consider the desirability of markets and to compare alternative policy options.

  In this chapter, we outline the assumptions and methods of welfare economics

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  Just Get Out of the Way

  How Government Can Help Business in Poor Countries

  • Robert E. Anderson(Author)
  • 2004(Publication Date)
  • Cato Institute

    (Publisher)

  1. Government Failure versus Market Failure

  This book is based on two beliefs. First, economic growth is essential for reducing poverty in third world or developing countries. Second, an efficient, dynamic, and growing private sector is the only way to increase the rate of economic growth. This book then takes the next step and asks what governments can do to help develop the private sector.

  The main conclusion is that the government often does too much. Many government programs and policies designed to help the private sector actually impede its development. The major reasons are the low level of ability or competence in most government institutions, the high level of corruption, and the influence of special-interest groups. Though private markets often fail to provide perfect outcomes, the ability of the government in poor countries to fix these failures is limited.

  This conclusion reminds me of what my exasperated father told me many years ago when I was attempting to help him carry out a home improvement project: ‘‘Son, if you can’t help, at least get out of the way.’’ The best that governments can do in many poor countries is just get out of the way. The following chapters analyze which government policies intended to help the private sector are likely to succeed and how they can be designed to compensate for the government’s poor ability to implement them.

  Government Corruption and Incompetence

  I first became concerned about government corruption and incompetence in 1991 when I went to work for the agency that managed privatization in Russia (the State Property Committee). Previously, I had worked on the privatization program in New Zealand managed by the Treasury. Though I was a U.S. citizen, the New Zealand Treasury recruited me along with a number of other foreign citizens to be regular members of the New Zealand civil service. The Treasury felt it needed additional expertise to help with the Labour government’s ambitious economic reform program under the leadership of the minister of finance, Roger Douglas.

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  Economics of Sustainable Development

  • Runa Sarkar, Anup Sinha(Authors)
  • 2017(Publication Date)
  • Business Expert Press

    (Publisher)

  CHAPTER 7 Market Failures and Public Policy Interventions In a market economy, goods and services are produced at a cost by the producer and sold to the consumer for a price. The good normally uses up resources such as raw material, labor, and technology, and they are all paid for. When the buyer buys the good, he or she pays the price to transfer the property right to himself or herself. Markets, therefore, function on the basis of prices and costs and are based on the concept of private property. Sometimes, in the making of a good, a by-product or waste may be created, which has adverse effects on people who are neither the producers nor consumers of the good. This third person, or society at large, has to pay a cost to mitigate the effect of the by-product, for example, toxic waste or a greenhouse gas. As a result of producing and consuming a good, society has to incur the cost of the pollutant, or a bad (opposite of good). We say the market fails in such a situation because the sum of the benefits that the producer and consumer derive does not account for the costs incurred by the affected third parties or society. On the other hand, there are instances of goods that are usually naturally available in abundance, which are owned by everybody and no private property rights exist, for instance, the air we breathe or the high seas. In such situations, there is no market for these goods defined by costs and prices, and there is a tendency to overuse the good, and hence leads to congestion or deterioration of the usefulness of the good. Both these situations create environmental stress. For instance, increased pollution in the first case and overfishing in the oceans in the second lead to such stress

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  eBook - ePub

  The Fattening of America

  How The Economy Makes Us Fat, If It Matters, and What To Do About It

  • Eric A. Finkelstein, Laurie Zuckerman(Authors)
  • 2010(Publication Date)
  • Wiley

    (Publisher)

  Are rising rates of obesity evidence of some failure on the part of private markets to meet consumer demands or to optimally allocate resources? As we discuss below, the answer appears to be no. With a few exceptions that we’ll discuss in the following two chapters, obesity is largely a result of the success, not the failure, of private markets to supply those goods and services that consumers are increasingly demanding. If true, then, as economists see it, government’s role in fighting obesity may be limited.

  Government policy makers buy into the market failure role of government, but they also take a broader societal perspective. This is fairly well described in an executive order produced by the Office of Management and Budget and sent to the directors of all federal executive agencies in 2003.1

  Executive Order 12866 states that any proposed regulation should clearly explain whether the action is intended to address a significant market failure. It further states that if the intervention is not to address a market failure, in order to justify regulation, the agency should demonstrate a compelling public need. In either case, the Order recommends that the government consider whether the intervention is likely to do more good than harm. In other words, it should watch out for unintended consequences, which, when it comes to government regulations, are often hard to avoid.

  In this chapter, in an effort to identify the appropriate role of government in fighting the obesity epidemic, from a purely economic point of view, we look for market failures that may be partly responsible for the rising rate of obesity. In Chapters 8 and 9 we return to whether there is truly a compelling public need to get Uncle Al and others to lose weight and, if so, we explore the appropriate strategies for government to pursue.

  Market Failures

  A market failure exists when the private sector cannot reach the optimal allocation of resources on its own. The optimal allocation occurs at the price where the amount of a product or service that consumers demand is equal to the amount that suppliers wish to provide. Although there is not a market for obesity per se, there are markets for many (but not all) of the products and services that influence our weight.These range from the obvious, markets for more and less healthy foods and weight-loss products and services, to those whose influence is less direct, such as markets for lawyers, health economists, and berry pickers, but that nonetheless indirectly affect how much we eat and how active we are in our daily lives.

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  eBook - ePub

  Housing Finance Systems

  Market Failures and Government Failures

  • S. Phang(Author)
  • 2013(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Part IV Government Failures

  The government’s role and, in particular, its deployment of a vast array of policy instruments in housing and financial markets, is often justified as responses to market failures. However, government policy and regulations (and the enterprises and agencies they create) are also subject to the risks of different kinds of failures and distortions. In the troubled 1970s, economists at the University of Chicago led by Milton Friedman, George Stigler, Gary Becker, Robert Lucas and others brought about a general shift in economic thinking and a reevaluation of the appropriate balance of governments and markets. The Chicago School rejected the concept that market failure justified government intervention; in particular, if the imperfections in government behavior were greater than those in the market. Building on elements of public choice theory and the logic of collective action by interest groups, George Stigler also brought attention to the question of the degree to which private interests might capture regulatory agencies and legislators.1 The strong endorsement of these ideas by UK Prime Minister Margaret Thatcher and US President Ronald Reagan in the 1980s brought about a wave of privatization and deregulation in many infrastructural and utilities sectors that eventually spread to many other countries.2

  In the capital markets arena, Eugene Fama, Merton Miller, Fischer Black and Myron Scholes also began a new chapter in the evolution of quantitative finance at the University of Chicago’s Business School. They shared firm beliefs in the rationality and efficiency of financial markets which extended the notion that markets knew best and were self-regulating and that financial markets should set the priorities for corporations as well as for society. Support for their views came from no less than Alan Greenspan, chairman of the US Federal Reserve from 1987 to 2006. In 1999, Greenspan played a key role in encouraging the repeal of most of the Glass-Steagall Act (a Depression-era legislation), an act that had prevented US depository institutions from taking part in investment-banking activities. Greenspan also believed in the capacity of private parties to regulate the risks in financial markets (including derivatives markets), as well as in a hands-off approach towards asset bubbles. In both cases, he refused to consider seriously the notion that markets could fail.3

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  The Role of Government in Water Markets

  • Vanessa Casado-Perez(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  48 certain actions undertaken by government in relation to water markets are not clearly aimed at efficiency. For example, compensation for the effects on the local communities in areas from which water is sold might be the only avenue for completing the transaction while overcoming social unrest and not paying a political price. Portraying this as a transaction cost or as a solution to a market failure seems too great a stretch, despite the fact that its cost might be exceeded by the benefits of the transaction.

  Government intervention to address market failures might take different forms, from compulsory regulation to soft law, conveying appropriate incentives to private parties or public agencies participating in the market. By drawing on the experience of current water markets and other environmental and non-environmental markets, this book aims to ascertain the proper degree of intervention after identifying the different failures using economic theory of regulation. The type and degree of government intervention that is warranted by the four rationales (public goods, natural monopoly, externalities, and transaction costs) considered in water markets is difficult to specify with precision, and some overlap exists between the roles for government justified by different failures in water markets.

  Government intervention is not cost free, and most costs are borne by society at large.49 Some governmental actions result in governmental failure, which refers to instances of, for example, inefficient governmental action or regulatory capture. The idea is that the cure – governmental action – must not be worse for social welfare than the disease – market failure. Government intervention is, thus, only justified if it is welfare enhancing, i.e. where it entails more benefits than costs. Ideally, not only should it be beneficial overall, but it should also be crafted in such a way as to minimize costs.50

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  Modern Economics

  An Introduction

  • Jack Harvey, Ernie Jowsey(Authors)
  • 2007(Publication Date)
  • Bloomsbury Academic

    (Publisher)

  Thus to achieve the advantages of the market economy – the decentralisation of decision-making by households and firms, and the incentive of the profit motive for efficiency and innovation – some government intervention is necessary. This must go further than simply providing a framework of rules covering, for example, the protection of private property, the enforcement of contracts. The government has to take an active part in improving the efficient working of the market economy and, making normative judgements, ensuring more equity in the distribution of income.

  14.3THE ECONOMIC FUNCTIONS OF GOVERNMENT: A SUMMARY

  The economic functions of the government, therefore, fall under three broad headings: the allocation of resources, stability of the economy, the distribution of income.

  The allocation of resources

  Our discussion of the possible reasons why defects in the allocation of resources can occur, suggest that the government must be concerned with: (a)imperfect competition, particularly with regard to monopoly and the immobility of resources; (b)external costs and benefits; (c)imperfect knowledge, both in the present and as regards the future; (d)community goods, where a pricing system cannot be operated.

  Stability

  Stability of the economy involves the government taking measures to achieve: (a)full employment; (b)a stable price level; (c)a balanced regional development; (d)a healthy balance of payments; (e)a steady and acceptable rate of growth. As we shall see, the government faces difficulties in achieving all these objectives simultaneously.

  The distribution of income

  Since satisfaction is personal to the individual (see p. 9 ), welfare resulting from a redistribution of income cannot be dealt with scientifically by objective measurement (see p. 9

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