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Author Topic: Market Failure, Government Failure?  (Read 438 times)

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Market Failure, Government Failure?
« on: January 24, 2009, 05:55:46 AM »

This is one of my occaisional educational little threads to help you poor saps get through life a bit better


Market failure is one of these terms that politicians will use rgularly to try to get themselves of the hook. So what is market failure? financial markets crashing? nope dont think so.

http://www.economist.com/research/Economics/alphabetic.cfm?letter=M



When a market left to itself does not allocate resources efficiently. Interventionist politicians usually allege market failure to justify their interventions. Economists have identified four main sorts or causes of market failure.

? The abuse of MARKET POWER, which can occur whenever a single buyer or seller can exert significant influence over PRICES or OUTPUT (see MONOPOLY and MONOPSONY).

? EXTERNALITIES ? when the market does not take into account the impact of an economic activity on outsiders. For example, the market may ignore the costs imposed on outsiders by a firm polluting the environment.

? PUBLIC GOODS, such as national defence. How much defence would be provided if it were left to the market?

? Where there is incomplete or ASYMMETRIC INFORMATION or uncertainty.

Abuse of market power is best tackled through ANTITRUST policy. Externalities can be reduced through REGULATION, a tax or subsidy, or by using property rights to force the market to take into account the WELFARE of all who are affected by an economic activity. The SUPPLY of public goods can be ensured by compelling everybody to pay for them through the tax system.


Or in other words where a market equillibrium is not at the competative rate or a market fails to exist, public goods(dodgy example) or a geographical monopoly(oil maybe).

I dont neccasarily agree with the economists definition as I was taught there were 3. Externalities were not included as they were "exsternal", duh, and you can set up markets for polution. In fact this definition is well screwey but its the closest ive come across which suggests how vague people are about it.

Then theres government failure from wiki as the economist doesn't have one which reflects that that estemed organ is increasingly run by cretins.

Just as a market failure is not a failure to bring a particular or favored solution into existence at desired prices, but is rather a problem which prevents the market from operating efficiently, a government failure is not a failure of the government to bring about a particular solution, but is rather a systemic problem which prevents an efficient government solution to a problem. The problem to be solved need not be a market failure; sometimes, some voters may prefer a governmental solution even when a market solution is possible.
http://en.wikipedia.org/wiki/Government_failure

So whats the best way to decipher all this jibber jabber?

Well my definitions are Market failure is a failure to trade in a market, this covers public goods, geographical monopolies and monopolies which are a limitation of trade, oh and some exsternalities.

My definition of Government failure is a failure to regulate. Now my definition is in fact a bit leftwing as it assumes that government can do it in the first place, but that is not the point.

By defining these concepts which most economists see as loaded anyway its easier to tell who is ultimatley responsible, if someone is.

An example.

Out of town shopping centres. This is described as market failure, supermarkets building on nice new land cause environmental polution and sucks trade out of towns which are business clusters. Yea well maybe and companies will build where ever they can make the best buck but that doesn't mean they should.the final decision reasts with planning authorities, hence Government failure. And if genuinley unpopular maybe a new term of democratic failure?


I think I will write to the economist later anyway hope this helps.
 :grin:
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