Martket Failure Policy Essay

The free marketplace represents a superlative model of capitalism, since it denotes the most proficient and profitable way of production. In a free market, economic actors are capable of conducting business devoid of political interferences, such as the burden of a minimum wage, or trade in tariffs. Without these limits, economic actors are abridged to a state of clean competition, driving costs downstairs and resulting in senior quality and lower price products.

First and foremost, market is inherently composed of government part as a policy-maker. Some ideal economist may argue that a free market without the existence of government will optimize the social utility and make every single person better off. However, the model of supply and demand is just simply a model which merely provides us with theoretic research and a murky outlook to a piece of complicated and cruel real world. For instance, a lot of African countries are suffered from pain of war and economic depression, stuck into the chaotic vortex and lacked of the ability to escape away. The essence behind this phenomenon is quite astonishing. According to a United Nations development program’s report which places much poverty on bad government,

1. On Market Failure – We said that the rationale for public policy is either market failure and/or government failure. Address the following with this rationale in mind:

Choose one of the three types of market failure and give a real world example of it. Do you believe the government has the ability to solve this problem?

The current issues that have been created by the market have trapped our political system in a never-ending cycle that has no solution but remains salient. There is constant argument as to the right way to handle the market, the appropriate regulatory measures, and what steps should be taken to protect those that fail to be competitive in the market. As the ideological spectrum splits on the issue and refuses to come to a meaningful compromise, it gets trapped in the policy cycle and in turn traps the cycle. Other issues fail to be handled as officials drag the market into every issue area and forum as a tool to direct and control the discussion. Charles Lindblom sees this as an issue that any society that allows the market to control

As Milton Friedman once said, “Freedom is a rare and delicate plant. Our minds tell us and history confirms that the great threat to freedom is the concentration of power. Government is necessary to preserve our freedom, it is an instrument through which we can exercise our freedom; yet by concentrating power and political hands, it is also a threat to freedom.” Friedman’s “Capitalism and Freedom” takes us into the mind of an economic genius and shows us his beliefs in a free market and the threat it presents to a dictatorship. Friedman, clearly a supporter of the free market, gives examples to show how a free market can aid a society in striving for success, becoming more dominant, and becoming more powerful. Though, at times he does show how a free market has disadvantages and he makes us aware as to how it can aid people in gaining individualism, knowledge, and overall improving a society. A free market is one that the price of a good or service is determined by supply and demand, in theory, rather than by government regulation. Milton’s thoughts and theory is that through a robust free market with political freedom, economic freedom will follow. Showing how economic freedom is a crucial toward the success of political freedom, Friedman’s theory of a free market and the Do Nothing Principle are major themes throughout his book.

1. In the United States, the government has played an important role in production in several sectors, although its role is far more limited than in most other countries. Market failures provide an explanation for government intervention, but not an explanation for government production.

Explain whether each of the following government activities is motivated by a concern about equity or a concern about efficiency. In the case of efficiency, discuss the type of market failure.

As Professor Jasso mentioned the Glass-Steagall case in which fulfilled the requirement of market failure, it is important that investors understands how to make best decision before they ended up in bankrupt (Jasso, 7). In this case, there is nothing perfect because the case of Steagall had proof how policy needs to be improved from time to time. People will always make mistake and in order to be right, they need to have a good policy. However, a good policy did not determine how well a person will behave in their society.

The result is an unfair distribution of impacts that does not maximize social surplus. Weimer and Vining call externalities a “missing market” (p. 92). It is feasible to imagine externalities being accounted for by a private market, in cases where, for example, an externality is manifested into a change in land value. However, these cases are exceptional. Governmental must typically step in to value externalities, such as charging fines for polluting industry, in order to account for social costs and benefits.

Market failure is where there is a misallocation of resources in the economy, either completely failing to provide a good or service or providing the wrong quantity. A negative externality, which is the same as an external cost, occurs when the consumption or production of a good causes costs to a third party, where the social cost is greater than the private cost.

When the government interferes to dictate what market participants can or cannot do, resources cannot flow to their most efficient use. If people cannot do the things that they find most profitable, they lose the incentive to invest and innovate. Thus, if the government puts a cap on house rents, landlords lose the incentive to maintain their properties or build new ones. Or, if the government restricts the kinds of financial products that can be sold, two contracting parties that may both have benefited from innovative transactions that fulfil their idiosyncratic needs cannot reap the potential gains of free contract. People must be left ‘free to choose’, as the title of free-market visionary Milton Friedman’s famous book

(Hints: Graph the market failure and explain the problem. Then show how the government action will change the situation.)

Policy and Economic Implications. The environment is a type of public good, and the market usually does not adequately protect the common resources which forces global community to bear the cost of environmental degradation and other negative consequences thus causing dead-weight loss and market failure. This is known as the classic “free rider” problem and the paradox known as the “tragedy of the commons” (Mankiw, 2012, p. 224). Negative externalities associated with the global climate change are examples of a type of market failure (Gruber, 2013, p.123). It stresses the need for international intervention and regulation such as environmental policies, environmental taxes,

In economics, some classical liberals believe that ‘’an unfettered market’’ is the most efficient mechanism to satisfy human needs and channel resources to their most productive uses. The minimal government advocacy of an ‘’unregulated free market’’ is founded on an ‘’assumption about individuals being rational, self-interested and methodical in the pursuit of their goals. Adam Smith was not an advocate of pure capitalism. Adam Smith allowed for many exceptions to a strictly free-market economy. The classical liberals advocated policies to increase liberty and prosperity. They sought to empower the commercial class politically. They abolish royal charters, monopolies and the protectionist policies of mercantilism to encourage