ECO535 The Digital Economy Wk4 Government intervention

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535

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Economics

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Feb 20, 2024

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Amber Bowden ECO/535: The Digital Economy Wk 4 Discussion - Government Intervention The objective of an economy is to generate wealth and welfare for society, using the available resources. Some institution is required to facilitate this resource allocation process across alternative uses. This fact involves tradeoffs and opportunity costs. Two such institutions are: Market and Government. Unemployment is a term referring to people who are employable and seeking a job but are unable to find a job. We can define Insurance as any means to protect from financial loss. It is the financial support given by the government of any country to its citizens when a person is unemployed and unable to meet certain basic requirements while seeking new jobs. The process of unemployment insurance is regulated by the government of that country. There are several benefits examined of this as below: 1. It helps in maintaining the consumption level in the economy. 2. It allows unemployed people to look for a better job. 3. It ensures to benefit the economy. 4. It ensures the flow of government money in the right direction. 5. It Provides longer durations of benefit recipients. Though we have many benefits of unemployment insurance, the same can lead toward market failure if resources are not used efficiently. This issue can be seen in any case in the public sector provided benefit or private sector provided benefit. Market failure usually occurs when markets operating without government intervention fail to deliver an efficient or optimal allocation of resources. This means economic and social welfare will not be maximized, leading to a loss of

Amber Bowden ECO/535: The Digital Economy production efficiency. It can also be defined as the inability of an unregulated market to achieve efficiency in all circumstances. There are three types of situations in which market failures arise: 1. Provision of goods and services that we consume in common with everyone else. (unemployment insurance is a public good and can be claimed by any unemployed person). 2. Production of goods where external costs or external benefits are present. 3. Restriction of output by monopolies and cartels. Government interferes with the economy to redistribute wealth and income. This redistribution is justified as a basis of some notion of equity or distributive justice. The public interest theory states that the government predicts that action will take place to eliminate wastage and achieve efficient allocation of resources. Here, government intervention will ensure to redistribute unemployment insurance in a most efficient way. Unemployment Insurance is a public good which the government pays subsidies on for its provision. A public good is a good or service, each unit of which is consumed by everyone and from which no-one is excluded. It is non-rival this means one person’s consumption doesn’t reduce the amount available for the next. It’s non-excludable, which means there is no sort of discriminatory actor involved. Everyone is entitled to it when we need to. Unemployment is an increasing factor in our society, with 14. 2% unemployment rate recorded by the CSO in 2012. This means there are many people availing themselves of cash benefits that they do not pay for. These people are called free riders, a free ride is someone who consumes a good without paying for it. A person receiving unemployment benefit is a free rider as since they are unemployed, they are unable to pay taxes, which provide these benefits (Picardi 2023). A free rider problem will arise as certain people are not willing to pay. This means taxpayers who provide revenue for

Amber Bowden ECO/535: The Digital Economy the provision of these services (unemployment Insurance) will have a huge burden than those who don’t. Taxpayers bear the cost of aggregate risk that results in inefficient allocation. Economist Paul Krugman described the moral hazard as “any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly” (Cochea 2023). Moral hazard is the tendency to take unnecessary risks as the penalties of those risks are not borne by you). Since the inception of the provision of unemployment insurance, the government has increased its expenditure and cost on providing unemployment benefits. The cost incurred in this has been increased at a faster pace. Though cost and expenditure has increased, the recipients of this benefit are less than the demanders of the said benefit. This is due to the inefficiency of the government in distributing the benefits of unemployment insurance in an even manner and in a most efficient way. When market failure occurs, government intervention is utmost important to handle the situation and redistribute income and wealth in an efficient way to curb the inefficiencies in the market. Since unemployment coverage is a wider phenomenon, it is not possible for the private sector to handle the provision. Government intervention is always required in this provision. The program of unemployment insurance should be continued as it helps many unemployed people who are able to get bread and butter based on unemployment insurance and to fulfill their basic requirements. But since the government is often not able to transfer the benefits efficiently, some modifications are also required to achieve the maximum efficiency level. 1.There is a need for evidence-based unemployment insurance reforms. 2. Fix outdated system of data collection to enable evidence-based policies. 3.Institute functioning system of job sharing to prevent costly layoffs.

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