Market Failure Is a More Significant Problem Than Government Failure - Essay Example

Market failure is the ineffective provision of resources in a free market and a burden to the economic welfare. It occurs when the competitive consequence of the markets is not content in the perception of the society. Market failure could be either complete market failure whereby a market does not supply goods and services at all or could be partial market failure whereby the market functions but produces the wrong quantity or price of goods and services. In the market failure, price mechanism flops in the process of accounting for all costs and benefits used in the consumption of specific goods. In this case, the market is unable to produce the supply of goods that are socially acceptable, but would rather overproduced or under produced. In order, to grasp the meaning of the market failure, there is need to survey the reasons that lead to the situation. The market failure may arise due to positive and negative externalities in which an externality is a result that occurs in a third party due to use of services or products (Muge & Keech, 2013). Positive externality is the effect that results from the manufacture or utilization of services or goods. For instance, free immunization for children against diseases would result in growth of a healthy nation hence high production of services of goods and services (“Economics and BS,” 2016).

Looking at the graph, the private benefit is accounted for at price p. However, if they are accounted for the curve moves to the right, changing the equilibrium to P1 and an increase in quantity into Q. An underproduction market is shown by the change between Q and Q1 that indicate the market failure.

On the other hand, negative externalities are negative effects that result on the third party individuals such as the issue of passive smokers (“Economics and BS,” 2016).

In this case, at price P the supply curve accounts for private costs of a given action leading to the purchase of quantity Q. External costs shifts the curve to S1. In effect, the price increases to P1 and consequently the quantity decreases to Q1. Adverse externalities are associated with overproduction shown by the difference of Q and Q1.

The cause of market failure also involves the environmental pollution and its effects as well as efforts to curtail its effects. Lack of public goods also results in the situation due to problem of free riding in which individuals profit from goods and services without the payment of the costs of such goods and services. The public goods are better because their cost of production does not change with the number of consumers. Underproduction of merit good also results in market failure. The society believes that these goods are not fully consumed and involves the positive externalities. On the other hand, overprovision of the negative externalities also results in the situation of market failure such as prostitution and use of alcohol. Misuse of monopoly power also results in the problem due to restriction of output with an aim of optimizing the profit.

In an attempt to overcome the cause and effects of market failure, the government intervenes, through taxation and production of subsidies (“Economics and BS,” 2016).

Introduction of subsidies by the government increase the supply shown by the left shifting of the supply curve from S-S1.

However, if the government intervention is not justified and if it results in an unproductive distribution of resources and failure in the economy, then the arising situation is known as government failure. Government failure results from lack of incentives due to its reluctance in making individuals dismissed from their jobs because of fear of losing political seats and fame associated with unemployment. This leads to inefficiency because the employees and managers are not in a position to generate incentives necessary in improving services. Political leaders may also have poor information about the services they provide because of their focus on politics and if they provide those services, they focus on short term because their future is not clear and thus avoid long-term effects. Nevertheless, the government failure can be caused by the moral hazard effect in which the government assurances all bank deposits in order to secure the financial system. In this process, the banks are encouraged to take risks that often result in failure.

Government failure results from the occurrence of the market failure. Therefore, if the market failure could be avoided then the government failure could also be prevented. This has been discussed above in the definition for government failure that is because of the intervention of the government in a process of curtailing the effects and causes of the market failure. For example, due to the manufacture defect that lead to the roof rapture of the Southwest Airlines 737, early 2011, the government could have intervened following an earlier similar case in 2008 (Winston, 2010). The airplane was flying from Phoenix to Sacramento before it was required to land due to a three-foot hole that opened at its roof. The airplane depressurized and made the passengers nervous due to fear of the airplane crashing. Despite that, hundreds of such cases have occurred in the past and reports that Boeing had a manufacturing defect the government had not intervened.

Furthermore, the market failure is more significant than the government failure because so far the effects that result from the market failure have proven to be devastating than those of the government failure. For example, environmental pollution is a market failure, because it results from the effects of consumption of products like fossil fuel, use of chemicals in firms, poor disposal of wastes in homes and industries among other causes that result in the process of production of goods and their consumption. Despite, the argument that pollution is a government failure, the causes of pollution are likely to be controlled by the individuals rather than the government’s intervention or policy. The effects of global warming have resulted in the loss of billions of money in an attempt to control it. Therefore, comparing the effects of the government failure and global warming, it is evident there should be more focus on the market failure than in the government failure.

Nevertheless, it is important to look into the limitations of the government limits that lead to the government failure. Every government is different and the limitations may vary from one government to another or from one state to another. One of the limitations involved with the government failure is the tendency of the political leaders to formulate laws or regulations that would benefit themselves even if they know that the distribution is inefficient. This is indicated by the inability to correct the market failure or unaccountability of public funds. For example, in an attempt to control the number of taxi most governments limit the number of taxies through licensing. A fixed number of licenses may be use that hinders the unlicensed drivers from the operation of the business (Morey, 2014). This is interpreted that the market overproduces the taxies and their services leading to negative externalities on the third parties that involve other road users. In addition, this licensing could lead to the control of quality driving because the passengers are unable to analyze the quality of the taxi drivers. In the imposition of negative externalities, the best approach used is direct taxation of the negative externality. In this case, the number of licenses should not be limited and one has to pay for the license in order to get it. This fee increases the cost of the taxi business through by the amount of the negative externality, and thus reducing the number of the taxies. On the other hand, quality control of taxi services may require the government to use voluntary registration that takes into consideration the quality mark that the taxi drivers who have passed particular would be the ones who would be allowed to undertake the business. These strategies combined leads to ensures that there is a taxi license that combines proficiency test and the quality as well as the ability for the taxi drivers to internalize the externalities in the taxi business. Licensing acts as a hindrance to entry making the qualified taxi drivers to raise their prices and cut down service due lack of competition. These policies are dangerous even when there is approved qualification of entry into the business by new taxi drivers. The government has broken the taxi business instead of fixing it benefiting the private taxi owners instead of the public (Marshall & Guillebaud, 2015).

Moreover, research indicates that individuals engage themselves in solution of a problem when they face great consequences. However, because the no particular person feels the real effects on the election results then it is difficult for them to think critically about the consequences of the votes. Besides, during voting the public has little knowhow on formulating policies related to the market failure and politicians could not have enticements in solving such issues. This limitation makes the politicians to formulate the policies that do little solve the real problems. Furthermore, most governments are challenged in shifting their behavior in response to new information. This is because if it were for the private businesses, individuals would not tolerate the mistakes of errors since competitors would take advantage of their failure to overthrow their business or create an opportunity for new entrants. However, the governments are reluctant to react to failures in business unlike a must do to the business owners. The political leaders avoid reacting to new evidence because to them it appears as a weakness. Nevertheless, governments are reluctant in collection of enough information on the programmer’s performance because if the information is unfavorable it could spoil their reputation. This is because if they formulate their policies it must be applied in the public to ensure that it is good for the public in the process if it is bad the policy maker is known. Therefore, this is a problem with the governments because they realize mistakes and become unable to formulate policies to solve these problems due to the fear of loss of fame if the policies fail.

Additionally, the market failure is more significant because there are many times when the manufacture and consumption of goods and services leads to the creation of external benefits that improves the social welfare. These include the external benefits that results from the development of the renewable energy sources like the geothermal energy. These renewable sources of energy are important because they reduce dependency on use of fossil fuels that release greenhouse gases that lead to global warming (Goodman, 2012). Similarly, the benefits from new technologies like the manufacture of electric vehicles by Tesla Company and Mercedes that are environmentally friendly. These vehicles use electricity that is environmentally friendly, and thus eliminating the use of fossil fuel that is a major producer of carbon dioxide, into the atmosphere. This leads to the reduction of air pollution although the new technologies are very much expensive that many individuals cannot afford. Besides, the benefits that result from vaccination or immunization programs that lead to the growth of a healthy nation hence increased production. The vaccination for the children helps them to be less susceptible to diseases and thus enable them to also attend school making them gain more income when they grow up and are employed. Furthermore, research by the world bank indicate that vaccination has positive benefits in savings on wealth because the medical costs that could treat the sick children from the diseases are high compared to the free immunization provided. Therefore, the negative perceptions of the society on the importance of the immunization are far much beneficial to both individuals and the community. Moreover, the development of new motorways and road development schemes provide benefits to the third parties such reduced transportation costs and reduction of accidents.

The discussion indicates that focus on the market failure is of more importance that the government failure due to the advantages that could rise from utilizing the benefits that result from the positive externalities. These include reduction of pollutants by introduction of new technologies into the market and manufacture of environmentally friendly products. On the other hand, the limitations of the government towards the intervention of the free market make the market failure more important than the government failure. These include failure of the government officials to formulate policies that could solve the market failure problems that are sometimes open to them due to fear of destroying their reputation and reluctance of enacting of such policies due to lack of the experience of the consequences that could result from such problems. Besides, the government officials would often formulate regulations that profit them rather than benefiting the public. Besides, the fact that market failure triggers government intervention that results in government failure shows that the market failure is more significant than the government failure. This has been shown by various government failures at different parts including the failure of the government to inspect the Boeing airplanes that have been proved to have manufacturing defects.