Government and Market Failures and their Effects - Essay Example

Government and Market Failures and their Effects Economic efficiency involves the availability of goods and services, in the right quantities, qualities, places, and time, without overexploitation of resources. It is only possible in a competitive market in which accurate information is available and resources are accessible in plenty. In addition, businesses must bear the full cost of their activities and reap maximum rewards from their efforts to achieve economic efficiency. Government intervention sets in with the quest to regulate the market, and this often has negative effects. This step from the government may result in a more inefficient allotment of resources than would happen without their involvement. In the end, there is market failure because the market fails to regulate itself to achieve economic efficiency. Market failure results when the government interferes with the market, often for its own good and success, rather than that of the economy. On the contrary, market failure may also happen owing too government inadequacies if it fails to, or insufficiently, intervenes. ‘Passive government failure’ refers to a scenario when government intervention would cause a socially beneficial mix of output. The housing bubble, BP oil spill, and payment of welfare benefits are three past government failures in the world that have had drastic effects on the economy and society. The global financial crisis, typified by the housing bubble is a good example of market failure. The downturn born of the housing bubble was a significant market failure that resulted from underpricing of risk, which a form of market distortion (Bernstein 1). There was an incorrect valuation of opportunity costs and risks. Pricing is a primary building block of capitalism, which demands that correct and important information about a market are provided in a timely manner. People borrowed into high-priced mortgages because of the underpricing of credit. It was either a case of ignorance about the market, because the only way they would pay off the high-priced mortgages is if the prices of houses continued to increase. Unfortunately, the bubble did not continue to inflate, prices plummeted, and many citizens were unable to service their debts. According to Bernstein, the profit motive coerced the actions of the lenders, because it is highly unlikely that they did not foresee such a market failure. It is the duty of government regulatory bodies to enforce regulatory functions to prevent the housing bubble. The Federal Reserve and a myriad of government agencies focused on the financial market have the mandate to avert market failure, but mistakenly, they assumed that the market would regulate itself. The combination of government and market failure is evident in the housing bubble scenario. Although initial government response was strong and successful, it had several inadequacies. The government intervened through credit market interventions and Keynesian stimulus, but this created some imperfections in the market. The government theory that cutting the deficit in periods of weak demand will revitalize that demand was a misguided policy that foresaw imminent public debt. Government failure in the housing bubble was a case of inadequate oversight. Although the government instituted an appropriate policy to counter the issue, in terms of stimulus and credit market interventions, the resultant government failure from cutting deficits worsened the situation. Government failure has continued henceforth, especially with the incapability to achieve lasting fiscal policy. Coupled by challenges of retirement insecurity and global climatic changes, market failures from deep-pocketed forces continue to make the economy unfavorable, increase government debts, and weaken the economic standing of hard working citizens (Bernstein 1). The BP Gulf Oil Spill is another example of government failure. The government left the economic activity of drilling oil to "free markets", which eventually had adverse health and environmental effects on citizens, and affected the oil industry. Pundits in the market believe that the government should run such activities because private forms are so profit-driven to gain the trust of the society. Even so, the reverse is true, as the government is at times not trustworthy and their actions cause market imperfections. The government issues permits in drilling operations, and it is their duty, according to the law, to ensure that drilling companies complete such actions in an efficient manner. The government failed to monitor BP and subcontractors Transocean and Halliburton processes in what is the government’s lawful property. Naturally, government regulators do not have a similar attachment to property as private developers do. Special conflicts of interest among regulatory agencies means that they benefit from market failure and other vicious process to the society. The government has a duty to protect people who live next to shorelines from the unsustainable and perilous effects of offshore drilling. Carolyn Windsor and Patty McNicholas name the US Federal Government agency, Minerals Management Service in the Interior Department, as a government regulatory body that enjoys financial remuneration from the drilling it authorizes and regulates. The BP oil spill scenario is a special case in which both government and market forces failed to avert and resulted in arguably the most horrible environmental adversity in United States (US) history. The government has to ensure both corporate and public governance as part of its moral and lawful obligation. Considering Minerals Management Service regulated drilling operations and collected income from offshore oil leases, a conflict of interest arose, which affected the reliability of the government agency. Similarly, there was little clearness or public analysis of the corporate board and administrative functions of BP officials. The government protected BP’s capitalistic behavior at the expense of the society’s welfare, in terms of downplaying company scandals. In addition, reports and investigations indicate that BP’s cost-cutting strategies and negligence resulted in the massive oil spill. The effect was the abuse of the natural environment, a prime habitat for sea life, and exploitation of workers who endured unfavorable working conditions. Systematic government failure failed to protect the public from the malpractices BP perpetrated. Marketized public governance allowed BP to explore and exploit offshore oil unsustainably, and in consequence, sacrificed the natural environment and the source of livelihood for millions of citizens who relied on the gulf. It protected the market form the society, instead of doing the reverse, which is to protect the society from the destructive aspects of the market. Surprisingly, the government affirmed that is was the duty of BP, as the party primarily answerable for the blowout, to respond to the disaster. Government failure is also evident in social programs such as payment of welfare benefits. In a policy analysis document, Michael Tanner judiciously explains how the government spends trillions of dollars to fight poverty, but still fails (Tanner 1). Government failure in this case is its policies that not only waste state resources, but the inability to improve the welfare of underprivileged Americans. The moral danger associated with the payment of welfare benefits proves how government intervention can affect the market. Citizens are well aware that the government will provide unemployment benefits and free treatment for the underprivileged. In consequence, they fail to act to improve their unemployment situation and continue with unfavorable health practices believing that the government will address their health needs. The culture of dependency, privilege, and reliance on welfare means that some Americans do not look for employment opportunities. In the end, a socially inefficient allocation of resources to resolve the market failure that fails to arrest unemployment exists (Winston 88). Welfare reform previously used a cost-sharing model in which the federal government contributed to finance state welfare programs. An increased need for welfare meant that the government increased its allocation. Currently, it uses a block grant, in which the government uses a fixed amount of money to design and implement the maximum number of programs that it can handle. This is detrimental because the money allocated endures market forces such as inflation. In addition, money saved from welfare creates a false economy, in which Americans believe that they are ‘saving’ costs, yet it means additional expenses in another sector (Winston 14). Owing to budget shortfall, the government has to redirect most of its funding and shrink the amount allocated to welfare. The effect of this is an increase in the number of poor families and the worsening of poverty. It also fails to prevent Americans reliant on welfare from the effect of the recession. In essence, the economy and market forces determine the amount allocated for welfare. As seen in the other two cases above of government failure, market failure will determine the fate of struggling families who are fighting for their survival in tough economic times. The multiplier effect of welfare payments has a depressive effect on the economy, especially because of its effect on taxpayers. As seen above, government intervention often results in market failure. The quest to create a market with perfect competition may make the market better or worse. Market failure arises because the market cannot operate efficiently, and this translates to government failure. The government may have good intentions to stabilize the market and create a perfectly competitive business environment, but there are often market forces that naturally undermine their efforts. There are times when a government solution works, while there are times when market solution works. In most cases, the government does not have enough information to make valuable decisions about the most appropriate way to apportion scarce resources. The government and the market are two fundamental institutions that determine economic performance. Market failure often results from government failure. At times, the government and the market are in opposition, instead of complementing each other, and the result is often increased failures. In the case of welfare reforms, government failure results from the belief that they are doing the right thing. These misguided conceptions have multiplier effect son other sectors of the economy. Government failure has drastic effects that citizens often notice, and recent polls indicate their dissatisfaction. Works Cited Bernstein, Jared. Market Failure and Government Failure. The New York Times. 2013. Penny, Joe. Why the government’s welfare reform can’t work. NEF. 2013. Windsor, Carolyn and Patty McNicholas. The BP Gulf Oil Spill: Public and Corporate Governance Failures. An Examination of Public and Corporate Governance Failures: The BP Gulf Oil Spill. 2012. Winston, Clifford. Government Failure versus Market Failure: Microeconomics Policy Research and Government Performance. Washington: Brookings Institution Press. 2007. Print. Read More