Government Business Relation - Coursework Example

Introduction One of the cornerstones of the capitalist system is that if there is a need someone or some organization is sure to fill that need and profit from it. There are some needs, however, that are so great or demanding that it does not make much sense for an individual or even a business entity to take responsibility for it. Those gaps in the market, in which no members of society are able to step forward to take advantage of a need or opportunity are classified as market failures. In other words, the invisible hand of the market is unable to ensure proper functioning in those particular domains. When the free market is unable to provide efficient allocation of resources some prefer that the government step in and take corrective action. Market failure and government intervention Market failure can occur when one or two companies abuse their market power. This may be a single buyer or a single seller that enjoys enormous power and can therefore charge or pay whatever it wants, thus robbing the market place of any semblance of fairness. Also, there are times when the market does not consider the effect of an economic policy. For example, in some countries, the government gives construction companies free rein to satisfy the housing needs of the population. These companies might concentrate on building high end condominiums and apartments because of the greater potential for profit. The end result is that those with low incomes are not able to afford any decent accommodation. Advocates of government intervention would see such a situation as evidence of market failure and call for the government to build low-cost housing for those who have fallen through the cracks. These so-called Externalities may also occur when, for example, a company emits toxic fumes into the atmosphere thus robbing people in society of their rights to good, clean air. When there is no cost for such pollution advocates of government intervention are usually quick to call on the government to impose some penalties on the offending companies. Another area where market failure is said to occur is in the provision of public goods. One person might hire a security officer to guard his or her house but what if the menace of crime is so severe in a neighbourhood or in the city that from home to work one faces the possibility of being mugged or having one’s house burglarized. One cannot always walk around with body guards unless, of course, is very rich. In a society filled with people of varying financial fortunes it just makes sense for the government to take over the issue of security and provide police services that protect all. Of course, some people may refuse to pay their proper share of taxes and thus enjoy a free ride in public safety and protection. Finally, when there is asymmetric information or uncertainty some people in society might benefit more than others and profit from their knowledge. “Information asymmetries occur when consumers do not have the same level of information about a product or service as producers do. This may result in lower quality products driving higher quality products out of the market. In such cases, government may have to intervene to impose minimum information requirements (e.g. labeling) or to facilitate the proper identification of appropriately qualified suppliers (accreditation)” (Flowers 2006). Information usually flows very quickly so it is possible that the kind of market failure that relies on information may be remedied quickly unless in a situation where millions of people, for example, lose out on the stock market as was the case with the Enron scandal. Many people lost their whole savings and had nowhere to turn except to the government for some relief from their unexpected ordeal. Other elements mentioned above such as labelling are also considered important in dealing with such information asymmetries and uncertainty in the market place. For those who advocate government intervention there is a remedy for every market failure. For example, through the use of anti-trust laws, it is possible for the government to curb the power of a monopoly or a monopsony. With regard to externalities the government can make use of a combination of regulation, tax, or subsidy to force offending companies or individuals to consider the cost of their activities to the society as a whole. Through the tax system the government can force members of society to contribute to the supply of public goods such as roads, bridges, and the police force. The government is forced to intervene sometimes for the true benefit of society but also sometimes to assure its own survival because when people feel that they have fallen between the cracks and nobody cares they often tend to the government for remedy. People who are frustrated because of not having homes to live in might demonstrate peacefully or cause trouble of some sort so a government that wants a peaceful environment will ensure that those who are disadvantaged by the free market system get some kind of relief. The theory of market failure and potential government intervention sounds fine and idealistic but in the real world government has increasingly been seen by some as part of the problem rather than the solution. In fact, the public bureaucracy has, in many countries, particularly in developing ones, been seen as not only parasitic and restrictive but also an invasive entity. As the article “Reforming developing country bureaucracies,” points out: The "public interest" model of public service organization largely influenced the pervasiveness of bureaucracy as an instrument of the state for development. Lately, however, this model has come under attack… The neo-liberals have posited that the most serious flaw in the model is the tendency of public bureaucrats to act in their own private interests at the expense of the poor. Marxists added that the very nature of bureaucracy is undemocratic because bureaucrats are not accountable to the mass of the population affected by their decisions. (Reforming developing countries’ bureaucracies 1999). The government, for example, may be called upon to intervene in a situation where some citizens are unable to afford the high cost of accommodation. In such a case, the government is expected to present some of its own citizens with some humane options. Unfortunately, the nature of bureaucracy, as Max Weber, found in his time was that in discharging business according to calculable rules, “As bureaucracy develops the more perfectly, the more it is dehumanized" (Reforming developing countries’ bureaucracies 1999). The failure of the market that the government is supposed to correct has given way to discussions about government failure. In many cases, it appears that the lack of competition in the government sector works against productive efficiency in the public sector. In other words, while the government might be called upon to deal with the problem of monopoly it is itself a monopoly! As Sherwin Rosen, an economist at the University of Chicago and senior fellow at the Hoover Institution notes, “Public enterprises insulated from competitive pressure tend to be slower to change practices and adopt cost-reducing innovations because sharp competitors and superior alternatives are not around to discipline them,” (Reforming developing countries bureaucracies 1999). Despite the above shortcoming mentioned, one top advocate of government intervention suggests in a report entitled Improving the Cost-Effectiveness of Government: Alternatives to Command and Control Regulation government ought to step in when the market fails to operate efficiently and also for the purpose of achieving social objectives such as equity and consumer protection (Flowers 2006). A whole range of options are suggested to governments that want to interfere in the market with options such as the following: Alternative Regulatory Designs, including performance based regulations, safe harbours that provide companies with the choice of following set rules or developing their own, waiver or variance provisions, process regulations, automatic updating that makes use of formulas to anticipate and regulate future needs, ex-post control which grants automatic approval and rewarding of good behaviour It seems that those who cry for government intervention often do so more out of wishful thinking than a clear understanding of how governments operate in the real world. Joseph Stiglitz, a proponent of government intervention and an academic, became more clearheaded after serving time in Washington in the Clinton administration. Following his stint in Washington, Stiglitz came to the conclusion that government was plagued with four problems that made it difficult to do a good job of intervening effectively in the face of market failure. These were “commitment problems, bargaining problems, imperfect competition, and asymmetric information. Stiglitz now believes that these problems prevent the government from implementing efficient policies. He also contends that incentives for secrecy in government are central to these problems” (MacKenzie 2002). As to how government could better meet the role for which interventionist suggest Stiglitz has come to believe that, “Making government processes more open, transparent, democratic and more participation and effort at consensus building is likely to result not only in a process that is fairer, but one with outcomes that are more likely to be in accord with the general interests. Perhaps we can bring [efficiency] to government" (cited in MacKenzie 2002). Conclusion It is not uncommon for laymen and women to think of scholars as objective seekers for knowledge. The truth of the matter is that in many cases, once a scholar latches on to an idea, he or she does not want to let go. This has allowed a measure of bias to creep into the work of even some of the more distinguished people in academe. D.W. MacKenzie makes the argument that if indeed there is government failure then would it not be better to look back to the markets for a possible solution to the so-called market failures? He suggests that Stiglitz’s contention that government should be made more transparent suggests that people are willing to bend backward to squeeze a measure from the jaws of failure in government. As D.W. MacKenzie further writes, “There is nothing inherently wrong with attempts to establish ends for us to aim at in economic matters. Those who desire more government simply for its own sake, however, should at least be honest about their intentions. Instead of pretending to be concerned with efficiency, Professor Stiglitz and others like him should admit that are advocates of particular ends rather than analysts of different means” (MacKenzie 2002). Now there are those who claim that market failure exists and should be remedied by government while others see government failure where they should see success. Passions run high on both sides. Cool heads ought to prevail in this debate because often the truth lies hidden between the extremes but we need to keep searching for it. Bibliography Beattie, Alan. “The global gadfly A Nobel-winning economist completes his recent trilogy of polemics on globalisation with a series of increasingly quixotic policy proposals.” Financial Times, (Sep 16, 2006):30. [Financial newspaper] Flowers, Geraldo. “Can Limited Government Intervention Improve Market Competition?” Florida Tax Watch, March 1999. [Online Journal] http://www.floridataxwatch.org/archive/wilkinson.html (October 9, 2006). “Reforming developing country bureaucracies.” Business World (Mar 12, 1999):1. [Financial Journal] MacKenzie, D.W. “The Market Failure Myth.” 8/26/2002 http://www.mises.org/story/1035 (October 9, 2006). [Online source] Read More