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Whatever economic system a country adopts, there is always a role for the government due to market failures. Can governments correct market failures? Illustrate your answers with example.

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Introduction

PA302 (1) CHAN Sau-fung (S05012153) Whatever economic system a country adopts, there is always a role for the government due to market failures. Can governments correct market failures? Illustrate your answers with example. Part One Adam Smith who proclaimed the principle of the "invisible hand" that holds every individual is led, as if by an invisible hand, to achieve selfishly the best good for all. Smith saw harmony between private interest and public interest. In his view, any government interference with free competition is almost certain to be injurious in the economic world. He recognized that the virtues of the market mechanism are fully realized only when the checks and balances of perfect competition are present. Under the perfect competition and with no market failures, markets will squeeze as many useful goods and services out of the available resources as is possible. However, in reality, markets may fail to function well under numerous reasons. According to Wolf1, there are two kinds of failures which are i) insufficient allocation of resources in terms of the quality of products and prices and ii) inequitable distribution of income or wealth. To be more specific, it includes the following: the inability to provide public goods, negative externalities, imperfect information and increasing returns to scale and monopoly. Public Goods "A public good is a commodity or service whose benefits are not depleted by an additional user, and for which it is generally difficult or impossible to exclude people from its benefits, even if they are unwilling to pay for them. ...read more.

Middle

For instance, governments attempt to correct monopoly and pollution (externalities) to encourage efficiency by introducing legal antitrust constraints on business behavior or antipollution laws. Incentive Policies Incentive programs are more efficient than direct regulatory policies. The two types of incentive policies are either taxes or market incentives. A tax incentive program uses a tax to redistribute income so as to lessen the situation of unacceptable inequalities of income and wealth. In fact, the tax often yields the desired end more efficiently than straight regulation as this solution embodies a measure of fairness about it, i.e. the person who conserves the most pays the least tax. An alternative to direct regulation is some type of market incentive PA302 (1) CHAN Sau-fung (S05012153) program that is a plan requiring market participants to certify total consumption. For example, when there is high inflation and unemployment rate, the government introduces monetary policies, hence, the changes in money supply and interest rates with a view to stabilizing through macroeconomic policies. Or, during slow economic growth, the government will reduce budget deficit and raise national savings rate in order to stimulate growth. Provision of public goods In case there is inefficiency in public goods, government must step in to provide public goods by spending expenditures. Apparently, the government plays an important role in promoting efficiency, achieving a fairer distribution of income, and pursuing the macroeconomic objectives of economic growth and stability. However, in reality, government intervention does not allow fine-tuning, and when the problems change, the government solution often responds far more slowly. ...read more.

Conclusion

Conclusion In fact, both market and government may fail. Perfect market or government is never existed. I opine that government's intervention, to a certain extent, is essential in maintaining the market's order. However, over-intervention may cause more harmful effects. Therefore, what is more important is who is running the government. An effective government is performing the role of check and balance. It sets up regulations and guidelines so that the private business sectors can follow and enable then to take on global competition. And, at the same time, it helps to protect our labour and avoid exploitation. On the other hand, there are areas in which the market can help government, such as in the areas of education and the privatization of government agencies. Therefore, whether the harmony between the government and market can be maintained depends solely on the one who runs the government. Reference: 1. Market failures: http://elmo.shore.ctc.edu/economics/market.htm 2. Government Policy & market failure: 2.2. http://wwwz.gsu.edu/~ecorlcx/colander-Ch15-market failure.ppt #16 3. The role of the government: http//www.clas.ufl.edu/user/rjohnson/graduate_policy_Analysus/Market failure.html. 4.Business and Government in the Global Marketplace. (7th edition), Murray l. Weidenbaum 5.Economics (14th edition), Paul A. Samuelson & William D, Nordhaus PA 302: Assignment One From: Chan Sau-fung (S05012153) 1 Wolf, C Jr (1993) Markets or Governments: Choosing between Imperfect Alternatives, Cambridge, MA: The MIT Press, (p.17) 2 Baumol, W J (1988) Economics: Principles and Policy, Ch.29, 'The market mechanism: Shortcomings and remedies' (p631-51) 3 Wolf, C Jr (1993) Markets or Governments: Choosing between Imperfect Alternatives, Cambridge, MA: The MIT Press, Ch 4 ?? ?? ?? ?? 1 ...read more.

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