Market and Government Failures –

Market and Government Failures –

Business Finance

Each week, you will be asked to respond to the prompt or prompts in the discussion forum. Your initial post should be 75-150 words in length

Politicians have a strong incentive to follow a strategy that will enhance their chances of getting elected and re-elected. Political competition more or less forces them to focus on how their actions influence their support among voters and political contributors.

What is market failure, and what kinds of things can lead to market failure? What is government failure? Can government failure lead to market failure?

Review concepts like shortsightedness and rent seeking. What are the effects of government intervention in markets with some of the price regulations like price floors and price ceilings we discussed in chapter 4? Please provide original work. No plagiarizing.

Below is lecture for assignment:

Microeconomics – Week #3 Lecture

Market Failure and Government Failure

What do we expect out of a market system? What do we expect out of government? Can markets achieve efficiency and equity at all times and for all people? What role does government play when and if markets move away from full efficiency and equity?These are some of the key questions empirically we ask and attempt to answer in economics. In most situations, the more competitive markets are, the more efficient and equitable they will be.

Efficiency losses in an economy can manifest when underproduction or overproduction occurs. We can assert that economic efficiency is represented by marginal cost and marginal benefit being in equilibrium.At a point on the marginal benefit curve above the equilibrium point, that is where underproduction would occur since marginal benefits outweigh marginal costs. On the other hand, if price is above equilibrium on the marginal cost curve, overproduction occurs.

Because there are efficiency losses, collusion, and less than perfectly competitive markets, market failure occurs.Underproduction produces benefit losses, while overproduction produces too much and costs in the opposite way. Market power of firms in which a lack of competition gives firms the ability of manipulating supply and output to achieve a desired revenue price can lead to deadweight losses and negative externalities (costs to non-consenting individuals, firms, or countries).While public goods, which consist of non-rival and non-excludable goods available to all in the public, can lead to inequity due to the free-rider effect of some individuals, firms, or countries exploiting the use of those goods for which they did not contribute the resources making the goods possible.

As a result of market failure, the government’s role tends to expand. Inherent to the role of government is protection of individuals in society. That protection not only takes the form of military, police, fire, and other entities who roles are to protect society from physical harm, but protection by government is also overseeing markets to ensure market competition is highest, collusion is lowest, and equity and fairness occur through the market exchange process.Government failure can ultimately occur if actions taken by government actually lead to misallocation of scarce resources or less market efficiency and equity.

Market failure occurs when markets don’t achieve complete efficiency and equity. What leads to a higher government failure rate?Because the size of the federal government in particular has grown in size consistently since the Great Depression of the 1930s, the benefits sought after by individuals and firms from government has risen too. There are differences in government systems and market systems, but there are many similarities too. Just as market power and collusive actions in markets lead to market failure, so too do those kinds of actions lead to government failure.

When we compare and contrast markets and government systems, what are some of the differences and similarities?

  • Competitive behavior is present in both market and public sectors
  • Scarcity imposes the aggregate consumption-payment link in both sectors
  • Private-sector action is based on voluntary choice; public sector is based on majority rule
  • When collective decisions are made legislatively, voters must choose among candidates who represent a bundle of positions on issues
  • Income and power are distributed differently in the two sectors
  • Self-interest is present in both government and market systems

Gwartney, J., Stroup, R., Sobel, R., & Macpherson, D. (2018). Microeconomics:Private and public choice.(16th ed.).Mason, OH:South-Western, Cengage Learning.

As we discussed in earlier lecture points, markets can improve in efficiency and equity when competition increases and gets closer to perfectly competitive, when collusion is reduced and/or eliminated, and when markets are in equilibrium between demand and supply (aggregate demand and aggregate supply).Similarly, government systems can improve in efficiency and equity when voters’ interests are fully considered, spending and costs are allocated prudently, and when economic and political harmony occurs.

Thus, as competition decreases in markets, market efficiency and equity fall; market failure increases. When the size of government expands and the processes within government systems fail voters and create more marginal costs than benefits, government failure increases. Market capitalism is compromised ultimately when government failure rises due to the following:

  • Special interest
  • Interest groups
  • Uninformed voters
  • Logrolling
  • Shortsightedness effect
  • Rent seeking
  • Widespread use of taxation, spending, and regulation
  • Public officials spending other people’s money

Gwartney, J., Stroup, R., Sobel, R., & Macpherson, D. (2018). Microeconomics: Private and public choice.(16th ed.).Mason, OH:South-Western, Cengage Learning.

In summary, markets seek equilibrium and will achieve greater efficiency and equity when competition increases and markets are close to or at perfectly competitive. However, it is rare perfectly competitive market competition occurs. Market failure does transpire when firms exercise market-power pricing and output, underproduction or overproduction is carried out, negative externalities are present, and when public goods lead to free-rider effects. Pareto inefficiency (one person is made worse off when one person is made better off) transpires thereafter, encouraging more government intervention in markets and economies. When government actions and/or policies lead to more market failure, then government failure ensues.

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