Market Failure & Government Role

Market Failure & The Role of Government: 

Market Failure & The Role of Government Arvind Tirkey

Market Failure Reasons: 

Market Failure Reasons Inadequate competition. Inadequate information. Resource Immobility. Public Goods. Externalities Arvind Tirkey

Inadequate Competition: 

Inadequate Competition Mergers & acquisitions result in larger and fewer firms dominating various industries. Decrease in competition tends to reduce the efficient use of scarce resources. For example : Why would a firm with few or no competitors have the incentive to use its resources carefully? Inadequate competition can occur on both demand and supply side of the market. Arvind Tirkey

Inadequate Competition: 

Inadequate Competition Monopolist Structure Supply side of the market – no competition. Oligopolistic Structure Temptation to collude is strong. Demand side If Government is the only buyer – there is little or no competition. for example : Space Shuttle, Hydroelectric Dams, Super Computers or High-tech Fighter Jets. Arvind Tirkey

Firms facing no adequate competition: 

Firms facing no adequate competition Spend profits on huge salaries. Bonuses. Executive jets. Country club memberships. Generous Retirement Plans. Influence Politicians to get special treatment. Any example? What will the government do? Firms related to utilities like: electricity – regulated by government to make sure firms do not misuse their monopolist status to waste or abuse resources. Arvind Tirkey

Inadequate Information If resources are to be allocated efficiently – consumers, businesspeople and government officials – all must have adequate information about the market conditions.: 

Inadequate Information If resources are to be allocated efficiently – consumers, businesspeople and government officials – all must have adequate information about the market conditions. Employees in local like secretaries, accountants, teachers get competitive wage. What if this level becomes international? …….. What will be the wages then? S ome information is easy to find in advertisements or on newspaper, BUT some information are not easy to get. If buyers and sellers need those information and if they are not able to get that information then what will happen? This consequence can be seen in the long run – Slow drain in the economy. Low rate of economic growth. Lowering in the overall standard of living. Arvind Tirkey

Resource Immobility: 

Resource Immobility What happens if an auto assembly plant, steel mill, or mine closes? - talk about land, capital, labor and entrepreneurs……. Resource Immobility Land will become a waste land as it is immovable. Firm building, machines, electricity lines etc. will not move but will be a waste in its place. Some workers will find job in other industries, but not all. Some workers will not be able to move, as they won’t be able to sell off their home and property to move to other place. Some workers would not like to leave their relatives and friends to find new jobs in other cities. What about immigrant laborers and officials? Real world example? Arvind Tirkey

Public Goods: 

Public Goods What happens if public goods are provided to an area where everyone consumes it collectively - talk about highways, national defense, police & fire protection……. Public Goods: Not all are paying for the product. What the companies will do when all who are using the product are not paying for it? For example: uncrowded highways, flood control measures, national defense?? Difficult to have all the people pay for it. Example: floodwalls in New Orleans during Hurricane Katrine : Who owned, managed the floodwall? Arvind Tirkey

Externalities Unintended side effects that either benefits or harms the third party not involved in the activity that caused it.: 

Externalities Unintended side effects that either benefits or harms the third party not involved in the activity that caused it. Negative Harm, cost or inconvenience suffered by a third party. Example: Upcoming Discotheque near a prayer ground. Noise and inconvenience caused to firms when an airport expands. Positive Benefit someone receives who was not involved in the activity. High-tech companies – dealing with noise-reduction. Additional jobs due to airport expansion. Arvind Tirkey

Slide 10: 

What type of market failure i s most harmful to the economy? Arvind Tirkey

The Role of Government: 

The Role of Government Resources are scarce. Competitive markets are the best to satisfy our many wants and needs. BUT markets can fail. Arvind Tirkey What to do then ? ? Government Intervention

Government’s Role to fix market failure: 

Government’s Role to fix market failure Maintain Competition, through: - Antitrust Legislation. - Government Regulation . Improve Economic Efficiency, through: - Promote Transparency. - Provide Public Goods. Modified Free Enterprise. Arvind Tirkey