Overview of the Market Failure - Literature review Example

?Questions Q1. a. Market failure may be defined as allocation of resources in an equilibrium that is not Pareto optimal, and which may result from natural monopoly, market power, externalities, lack of perfect information and public goods. 1Microenvironment efficiency or Pareto optimization occurs in cases where there is a possibility of making someone better off without making another one worse off. 2 Therefore, government policies are aimed at correcting market failure as characterized by the above factors. In other words, a perfect market will cater for the needs of all people without favoring others or without taking resources from some to benefit others. The Foreign Corrupt Practices Act of 1977, FCPA was enacted to reduce corruption in foreign markets. Therefore, the act was enacted to correct market failures. Corruption involves using money or other resources to influence the decisions of an individual in preferring one entity to the detriment of others. Companies that did not participate in corruption in foreign markets lost to those that did in awarding of government contracts and in venturing into new markets. This was a major problem that characterized market failure. Moreover market failure occurs in cases where there are weak laws to discipline and monitor institutions. Institutions will fail to protect their investors due to managerial misconducts. Consequently, both investors and customers lose huge amounts of investments.3 Examples of these include Enron, Global Crossing and WorldCom corporations that failed due to bad managerial decisions. Government failure on the other hand arises in cases where a government has created major inefficiencies by failing to intervene at the initiate stages of a problem when it could have been more appropriate to solve it more efficiently.4 Such intervention is of many benefits to the investors and consumers. Pareto optimization may be used to measure the extent of government failure in the same way it is used to measure the extent of market failure. Public choice theory explains government failure in a market. The theory stipulates that an individual will be more inclined to be motivated by self-interest, though some may base their actions on the concern for others.5 Government’s failure to prevent such selfish behavior among individuals at the expense of others is the main factor leading to government failure. Therefore, a government is responsible for putting in place checks and balances to ensure organization discipline in insuring investors against losses.6 i. Considering the two cases, market failure explains the policy behind Foreign Corrupt Practices Act of 1977, FCPA. Market failure involves unfair balance of resources that may lead to monopoly, lack of information, lower public good, among others. Most foreign corruption acts involved a company bribing foreign officials in foreign markets to have unrestrained access to resources, to block competitors from accessing resources or from enjoying government contracts, and blocking some companies from accessing the market. This resulted in creation of monopolies, and use of resources that did not accord to the public’s good. Therefore, the policy was as result of market failure. b. A negative externality that may result from market failure is damage to environment quality. When companies are allowed to harness resources in a country, most companies do not have regard to environmental degradation, and the effects it will have to the public. Companies will be more concerned on tapping resources for their production and not taking care of the environmental concern from people involved. When such companies have a monopoly over such resources, the general public may not benefit; the companies over exploit resources for profitability. An example is in the mining sector. Some companies are awarded rights to harvest certain minerals mostly in developing countries to contribute to the overall GDP of a country in exports. However, such companies leave large gaping holes of dilapidated land. Some do not take into considerations measures that could be used to reclaim the land. One advantage of government regulations in this case is that the government will keep such companies in check. The government will have the mechanism to ensure companies utilize resources sustainably, and that such companies do help communities living in such areas through Corporate Social Responsibility policies. In addition, the government will ensure that such companies after mining undertake land reclamation programs, making the land more useful to the public and to reduce any harm to the public or the environment. However, the disadvantage is that such regulations may discourage investors from a country. Investors tend to move from areas with strong market controls, preferring areas that have more liberalized markets with much less control. Putting in place such land sustainability policies requires that companies have to employ huge budgets in land reclamation activities after mining, which eats into the profitability of a company. This will discourage some investors from such states. c. A positive externality may be an example of subsidizing research and development and enforcing patenting. The government may encourage companies to have more research and development activities. This may be achieved by offering monopolies for companies to enjoy their products by way of patenting such developments. This is a positive externality in that companies employ huge budgets in undertaking research and development to find new ways of doing business or inventing new products in a country. By giving such companies monopoly through patenting, the government encourages more companies to participate in research and development work in a country. The more companies are involved in research work in any country, the more the country will have huge potential developments that will improve the economy of a country. For example, Hong Kong takes pride in having the best healthcare facilities and machinery globally. These have helped to improve the country’s healthcare system. Although monopoly is a market externality, offering monopolistic advantage in this case will have major benefits to a country and her people. This implies that market failure may not necessarily have negative externalities, but have positive ones also. Q.2 The foundation of FCPA 1977 is integrity in the society and in business operations. Integrity is measured by the degree of adherence to certain core values that define a society. In other words, the codes of conduct for all individuals within and outside US under the act were streamlined to reduce cases of corruption and collusion with foreign party and government agents in unethical business dealings. Sandel while discussing about virtue was outraged by brazen greed that has been manifested in the society.7 Sandel recommends putting in place laws that restrain such greed though punishment. However, Sandel makes exceptions in preferring life over virtue mostly in cases of extreme need, where life has to be sustained. In other words, Sandel advocates for a society that is founded on integrity and that operates in strict laws that prevent and discourage greed among members in protecting such integrity. Other policies that have been discussed in class over the same include the Securities Exchange Commission. The commission was put in place to investigate corruption and irregular dealings among public corporations. In addition, the Securities Exchange Act (SEA) made it illegal for an individual to deliberately ignore reliable and reasonable accounting standards in all auditing and accounting operations. In all the above policies, the policy goal was to enhance and promote integrity in office and in the society within and outside US and by all people who are in US or companies that are registered in US. Sandel discourages and criticizes freedom of unregulated individuals who use their free choice in the market; they do so for selfish interests, which undermine integrity.8 Sandel in other words discourages any self-preservation decisions for the benefit of the enter society. Integrity is the foundation on which the above policies seek to create strong social values through which every individual has to be judged in eliminating self-preservation as Sandel laments. b. i. One of the political hurdles in passing the bill into law involved the self-preservation aspect that Sande explains. Some individuals in government were the benefactors of huge contracts given to American companies in foreign countries through bribing. The Watergate Scandal of 1970 involving President Nixon uncovered massive irregularities and corruption among high ranking government officials. Such individuals had tried to water down the bill and ensure it was not passed into law. In addition, companies are as powerful as governments with massive power undercutting all sectors in the society. Some companies pushed the Congress against passim the bill into law for the sake of their operations. The companies were live to the strict nature of the bill and viewed it as a threat to their operations in foreign countries. ii. One of the major benefits of the law was that the government stepped in to protect investors from unscrupulous managers who used their levels in a company to bribe using shareholders’ money leading to losses. Among the major benefits was that the government was able to put in place strong accounting procedures and open up companies to scrutiny, which revealed massive rot in both private and public corporations. The act upon enactment into law was effective in reducing such corruption cases, ensuring that all companies had put in place accounting standards that could record all transactions in a company, making it possible to trace any misappropriation of funds in such companies. However, the act had some costs too. One of the costs was that while some countries did not pass regulations to prevent such bribing and had no problem with the vice, most American companies fearing repercussions from the act stopped operating in some markets or terminated contracts with foreign agents for fear of breaking the law. Companies were also supposed to put in place strict accounting standards and mechanisms to ensure accountability and openness, which increased costs to companies as well as opening companies to public’s scrutiny. This particularly affected the career of many managers previously involved in massive corrupt dealings both in private and public corporations. ii. The law by itself was financially feasible. Though it could have been expensive for some companies to meet the strict regulations as required under the act, the companies and stakeholders saved great amounts of cash that was lost through bribing. In addition to bribing and related cases, managers before the act used money mostly in public institutions for their self-goals robbing off the public millions of dollars in corrupt deals. In addition, the public had completely lost faith in most companies in the market with prospective investors holding on their investments due to the huge risks involved. Therefore, upon enactment, the bill proved to be financially feasible in the huge amounts of money that it saved from misappropriation. c. The law is a liberal policy. Liberals believe that in personal responsibilities, there is need for all to look up to the government to offer the right structures. Laws are put in place to protect all individuals informing an equal society. Sometimes, this has to occur at the expense of economic freedom where necessary. FCPA 1977 fits properly to this scenario. The act was passed into law to curtail economic freedom where companies and individuals used their positions to pay bribes to foreign parties and government. In return, they obtained contracts and the right to invest in such countries. In addition, the act curtailed the tendency in which unscrupulous managers and accountants used their positions to benefit from public and stakeholder’s funds for selfish financial gain. The act was intended to prohibit any business or economic behavior that did not confirm to the integrity and value standards as set by the government; as Sandel explains, the government has the obligation to put in place mechanisms that discourage and prevent greed and self-preservation at the expense of the larger public. 9 Therefore, the law as passed was more liberal in its attack on bribery and corruption. However, there were efforts to minimize the tight grips of the law where some conservatives lamented that it was necessary for companies to offer bribes where the laws of the foreign country did not criminalize such practices. This was done to prevent American companies from losing business to other foreign companies. 3. The social contract theory implies that there is a stateless society from which individuals seek to escape by entering into a social contract. Hobbes believed in self-preservation as a natural law and the man’s most important instinct to fulfill. He however took the view that man was a vicious being and could be expected to live in continued wars of a man against another man (Friend, 2004). Therefore, by living in constant wars, it was not possible for man to develop a social society with a culture or industry. The life of such a man has to be poor, solitary, naturally short and brutish. 10 By killing one another, man could live in continued insecurity throughout their lives. To escape from such terrors of war, natural, self-interested and rational men have to come together to surrender their independence in forming a compact unity. Therefore, by desiring peace and unity, such men could therefore appoint a ruler among them who would guarantee their defense and security.11 In return, men would serve the ruler with utmost obedience and respect his laws. A state was thus an artificial creation towards achieving this end. However, Hobbes held that the pure role of a Leviathan state was purely to offer protection for its citizens. Any other interference of state into affairs of man could thus not be justified in any way. To Hobbes, the government was an object of rational analysis. On the contrary, Locke held a rather different view of the world from that of Hobbes. Locke believed in separation of powers into what divides a state into the current three branches of government (judiciary, executive and legislature).12 To Locke, the government had a role of acting as a commonwealth of men, but had to be guided by the natural law in respecting liberty, life and estate of the members of a society. Natural law is in contrast with Hobbes view that the government was an artificial creation. However, since nature did not offer any protection to properties, it was incumbent for man to make such laws by himself. According to Locke, men had a duty to safeguard liberty, life and estate, which are derived from God himself. Lock identified the right to libel from unjustified laws and their makers, unlike Hobbes who insisted on respecting and obeying leaders.13 Locke believed that the state of Nature is the natural condition for mankind to be in a state of perfect and complete liberty that allows man to conduct his life in the best way possible without any interference from others. Such state unlike in Hobbes case is pre-political but not pre-moral. i. A Leviathan state is only obligated to offer security to its citizens without interfering with their lives. The American society has portrayed a continuous tendency of interfering with people’s lives through limiting certain freedoms, tapping into people’s communication among others. The state does not move towards a Leviathan state. i. The colonialists were receptive of the idea behind a strong national government, mainly motivated by their experience with unending instabilities and disorganization among states under the Articles of Confederation. Therefore, as Hobbes argued in avoiding unending conflict, rational men came to a conclusion on the need to cease conflict, join and have a single ruler who would protect all. The meaning of “if angels were to govern men” is that a government by angels would be a perfect one that would not need any internal or external controls. Angels unlike men have perfect sense of control and thus would not need laws to control them. iii. The US government balances power by having several institutions aimed at exercising power and checking one another. As Locke stressed, the separation of power into three branches of government would ensure no individual accumulates power to misuse use it on the governed. iv. A bill becomes law after it undergoes thorough scrutiny by the Congress as the people’s representatives. Congress undertakes to comb the bill to avoid any case where the bill contradicts rights of individuals as bestowed in the constitution. After concluding that it does not infringe on the constitution, and that it would good for the government, the majority vote passes the bill into law. v. Laws are implemented through the legislature. As Hobbes explained, men after electing leaders have a duty to respect and obey them. Such leaders are bestowed with the power to make laws and give it to the governed. They are required to obey such laws as far as they are in line with their rights. Bad laws as Locke explained need not be obeyed by the citizenly. Such laws once given to the public become supreme laws that govern the lives of people. vi. As Locke argued, men have an obligation to safeguard liberty, life and estate. The constitutionality of law is affirmed by the extent to which a law respects and safeguards these rights. Bad laws or laws that do not safeguard these rights as Locke argued would be disobeyed by the citizenry alongside the government that puts them in place. Read More