Describe the role government should play in correcting for market failures. Make sure to apply Saint Leo’s Core Values to your analysis, remembering that responsible stewardship calls on us to be ‘resourceful’. You should cite specific examples and applications, and take a clear stand on whether you believe the actions of government work towards resolving market failures or not.
Governments should play an active role in correcting for market failures, which will generally occur because the free market fails to provide an equal and fair share of resources. Governments need to intervene when markets fail. They can achieve this either through direct action or by creating and enforcing regulations that prevent individuals from creating monopolies and create a level playing field for all consumers to engage with the marketplace.
A successful government intervention would incentivize these behaviors through punishments, rewards, or other means that allow consumers to take advantage of the opportunity created by government legislation. This helps to correct market failures so that more products become available and regions can achieve more prosperity (Mazzucato, 2016).
The free market can be inaccurate because consumers may not have enough money to pay for certain products/services. For example, a free market may result in some people being unable to afford cars or computers, which could result in a lack of access to these needs and thus force the government to step in. Governments often attempt to help by providing tax breaks on health care and education, which in turn reduces the amount of money the public has available to spend on other things. The government is also responsible for providing roads and highways, which allows businesses to transport products to customers. Without this infrastructure, business owners would have difficulty transporting goods to consumers.
Governments also play a role in correcting market failures by providing services that are not able to be fulfilled by private enterprise or nonprofit organizations. For example, governments are responsible for establishing national defense by ensuring the security of a nation’s borders, which helps consumers to feel safe and secure within their region. This makes it easier for them to trust the businesses in their region and invest in them more easily (Gray, 2022). In addition, they provide social services that enable people to attain a higher level of education without facing overly high costs. These types of government programs also create less risky environments for people so that they can make better financial decisions and afford more goods (Coyle, 2020).
Governments also use their resources to help businesses to expand their operations. For example, they use tax revenue to provide incentives to open new stores, which creates more jobs and produces more revenue for spending on other goods and services.
Regulations can create monopolies that consumers would not be able to access without government intervention. For example, because the government regulates the industry of prescription drugs, drug manufacturers are able to set lower prices because they received financial assistance from the government. This will have the effect of reducing the amount of money available to small, privately owned companies that can create a competitive market.
A counterargument to this argument is that in many instances, new technologies and business models eventually render these regulations irrelevant. As an example, while government regulation may prevent all price competition on prescription drugs (which would lead to higher prices), it will eventually be irrelevant as newer technological innovations are able to deliver prescription medications at a lower cost, thereby rendering the mandatory price regulation entirely unnecessary.
The existence and enforcement of market regulations can create monopolies in the business world and prevent consumers from being able to access the product or service that they want. In the example above, because of government regulation on the prescription drug industry, there is a monopoly that prevents consumers from purchasing their medication at prices similar to what would otherwise be available (Coyle, 2020).
In addition, regulations can create monopolies for certain goods that do not benefit the majority of people living in a region. For example, government efforts to protect local businesses can result in a monopoly over the transportation industry, which means that businesses have the ability to dictate the prices that consumers are able to pay. This can have devastating effects on people living in rural regions where there is not as much economic opportunity available.
The existence of certain monopolies and regulations created to protect certain industries can be problematic for consumers who live in rural areas or simply do not have access to these specific goods and services. For example, people living in certain rural areas may not have access to the same roads or highways that provide easy access to businesses and services in large cities. The United States Postal Service is often criticized for being too far away to help these consumers receive their necessary medications.
The existence of certain regulations can have a negative effect on businesses that are unable to afford them. For example, many small-business owners feel they are at a disadvantage because they lack the capital to be able to afford complying with many of the regulations imposed on their larger competitors. This can reduce their ability to compete and results in the inability for them to flourish.
While the existence of market regulations has been a cause for concern at times in many industries, also see negative externalities on society. The critics of market regulation focus on the question of whether or not it is efficient. There are several ways in which a free market can lead to inefficient outcomes. The debate between the proponents and critics of government regulation is focused on whether or not regulations are efficient or poor public policies.
Regulations are not necessarily inefficient because they can improve the efficiency of a market. The problem arises when regulations reduce competition, prevent the free flow of information, and result in undesirable social outcomes. Therefore, to be efficient, a regulation must not interfere with the essential function of a market or be contrary to its purpose.
The economic efficiency of regulations can be measured by their ability to create an optimum allocation of goods among consumers. The goal is that consumer demand is met and that producers produce at the lowest cost possible. An efficient regulation must not interfere with these aims.
For example, a regulation that increases the cost of entering an industry that has become highly profitable could result in the loss of many jobs. If this competition is eliminated, it may take years or even decades for jobs to be recovered. This would create an inefficient outcome and make it difficult to achieve the optimum allocation of resources among consumers. So, if a job allotment is reduced by one person, then the amount of output produced will decrease as well.
Mazzucato, M., & Penna, C. C. (2016). Beyond market failures: The market creating and shaping roles of state investment banks. Journal of Economic Policy Reform, 19(4), 305-326. https://www.tandfonline.com/doi/abs/10.1080/17487870.2016.1216416
Gray, N. (2022). Correcting market failure? Stalled regeneration and the state subsidy gap. City, 26(1), 74-95. https://www.tandfonline.com/doi/full/10.1080/13604813.2021.2017193
Coyle D. (2020). Markets state and people : economics for public policy. Princeton University Press. https://worldcat.org/en/title/1099689682