Market failure refers to the economic situation where there is an inefficient supply or distribution of services and products in a free market. Besides, public policies involve the ways that the government addresses the citizens’ needs. They are dynamic since society keeps changing due to the advancement of technology, among other things. Under ideal conditions, markets should foster Pareto efficiency in the economy. In particular, Pareto efficiency means that resources are distributed efficiently (Notes 3). According to Joseph Stiglitz and Jay Rosengard (2000), there exist six conditions that cause market failures. They are incomplete markets, unemployment, the failure of competition, inflation, public goods, externalities, market disequilibrium, and information failures. Market failures significantly influence public policy since the government must intervene to protect the rights of citizens and ensure the existence of businesses simultaneously.
Although the government strives to ensure Pareto efficiency in business operations, the failure of competition emanates from monopoly, oligopoly, and monopolistic competition. For instance, in a monopoly, only a single firm dominates the entire market. In an oligopoly, a few enterprises operate in the market, and they discourage new entrants. Even when a market has many firms, they cannot compete perfectly since some businesses will always produce slightly different products. Pure public goods are part of the market failure since they cost nothing even by adding many people so that they can enjoy their benefits (Stiglitz & Rosengard, 2000). Moreover, it is impossible to exclude some individuals in benefiting from such goods. Externalities entail situations where a firm imposes the cost on others without compensating them. For example, when a person drives a car that does not have a pollution control device, one contaminates the air, hence imposing costs on others who might become sick. For this reason, public policies ensure that the government acts as an intermediary by creating a safe platform for everyone.
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Furthermore, incomplete markets involve a situation where private markets do not offer products or services since the production cost is more than what customers are able and willing to pay. Besides, complete markets provide all commodities regardless of their cost of production and what people can afford. As such, the government intervenes in the case of incomplete markets to encourage firms to offer products and services to satisfy its citizens’ needs. Another market failure that influences public policy is the lack of correct or imperfect information (Le Grand, 1991). If the government relies on firms to spread the information to others, they would only share limited data. On that note, the state ought to come up with proper channels of disseminating the information to businesses. For example, banking institutions are required by the Truth in Lending Act (TLA) to disclose their interest rates to borrowers (Stiglitz & Rosengard, 2000). In addition, the government regulates the money supply in the economy to control high rates of inflation, disequilibrium, and unemployment. Without the implementation of proper public policies, some individuals and businesses might oppress others so that they can dominate the market for an extended period.
The government failure in enacting proper public policies would result in various issues that would affect the economy and health of citizens adversely. Some of the primary problems that might arise are the increased barriers to new market entrants, market disequilibrium, and high rates of inflation and unemployment. Others are imperfect information dissemination, the imperfect competition of businesses, and the increased externalities. For this reason, government intervention enhances the creation of a conducive business environment. Democratic countries invite the public to participate in the process of making decisions through voting and surveys (Lehne, 2011). In essence, the primary role of the government becomes implementing relevant measures to ensure that all people and businesses enjoy similar rights. If the government fails in playing its roles well, the leading corporations in different sectors will set restrictions to discourage new entrants. In the long run, market disequilibrium would be the final outcome where the demand price significantly varies with the supply cost. Many people would be unable to afford numerous products since firms would raise their prices exorbitantly.
Another significant issue that would result from government failure is imperfect information dissemination, which might lead to flawed competition. In particular, digital government services enable individuals and businesses to get the right information and act accordingly. The failure of the government would hinder the flow of information such that only businesses with political affiliations will access the data on time (Notes 3). On that note, these firms would have significant competitive advantages that would make them more superior than others, resulting in imperfect competition. Some businesses would also pollute the environment and go unpunished. As such, many people would become sick, which might affect the economy adversely. When the majority of individuals become ill, they are unproductive where they spend more time to recover, leading to wastage of resources. In addition, the rates of unemployment and inflation would rise. Consequently, government failure would lead to multiple problems in society.
However, the problems discussed above can be addressed to facilitate effective intervention by the government. First, the state intervenes by enacting and implementing policies to safeguard both businesses and individuals. For example, the Food and Drug Administration (FDA) regulates the pharmaceutical industries by ensuring that the drugs and other biological products provided for human consumption are safe. Although business lobbyists influence congressional decisions, the government comes up with neutral policies that favor everyone (Lehne, 2011). Besides, in a democratic government, people’s opinions influence the implemented decisions. Second, the government must share relevant information through federal agencies, which should be disseminated equally and must be reusable. For example, all market players should have the right of accessing the data. Third, effective government intervention can occur if federal agencies are transparent in the manner they share the information to the public (Chapter 8). Fourth, the government should have market informers to understand the dynamics in business operations to avoid making policies that affect stakeholders adversely. By creating an equal platform where different market players operate without difficulties, the government is likely to eradicate unemployment. Most importantly, the money supply in the market should be regulated to discourage inflation.
In summary, market failures have different implications for public policy. That is the reason why the government intervenes to ensure the creation and maintenance of a conducive business environment. Some of the common market failures are imperfect information, externalities, inflation, public goods, incomplete market, the failure of competition, unemployment, and market equilibrium. The government failure would make the above issues to flourish, which would have adverse repercussions to individuals and businesses. The only way that government can eradicate the above problems is by intervening where necessary to protect the business and public welfare. Although having an ideal market competition is not possible, the state should make rules that favor the majority of businesses and people.
References
Chapter 8. Lobbying connections.
Le Grand, J. (1991). The Theory of Government Failure. British Journal of Political Science , 21 (4), 423-442.
Lehne, R. (2011). Government and Business: American Political Economy in Comparative Perspective , 3rd Edition. CQ College Press. Chapt. 6-9.
Notes 3.
Notes 4.
Stiglitz, J. E. & Rosengard, J. K. (2000). Economics of the Public Sector (3rd ed.). W.W. Norton & Company. Chapt. 4, 6 and 9.
