Market Failure Issues - Assignment Example

If property rights are not clearly defined, externalities such as pollution probably cause market failure In general, externalities can either be positive or negative. The problem with negative externalities such as in the case pollution is that this type of negative externality is often left undefined. For instance: Given that air pollution is not well defined, a steel manufacturing company that regularly emits air pollution will not be held liable for causing harmful effects not only to the environment but also the health of those individuals who live close to the manufacturing plant. Likewise, these people who are suffering from the negative effects of air pollution will not be compensated for the health damages. Often times a market failure would arise for the fact that there are quite a lot of manufacturing companies that produces not only a wide-range of products but also negative externalities like air or water pollution. If pollution will not be well defined under the property rights law, these manufacturing companies that produce air or water pollution will continuously produce negative externalities rather than exerting extra effort in controlling these negative externalities. In the end, it means that those people who do not engage themselves in buying or selling of the manufactured products will continuously pay for the damages produced by a firm. Given that a steel manufacturing company will be strictly required to compensate for the negative externalities the plant produces, the cost of these negative externalities would most likely be included in the operational cost of manufacturing steel. As a result increasing the operational cost of manufacturing steel, the market price of steel would also increase. Therefore, demand for steel would eventually decrease until the point of equilibrium is met. As soon as the demand for steel decreases, supply for steel will also decrease. As a result, the decrease the production of steel would result to a decrease in negative externalities such as air or water pollution. In other words, the economic implications of externalities require those individuals or firms that produce negative externality to pay for the cost they have imposed on those individuals who live around the area. Given that these externalities is well defined, inventors will be forced to innovate new machines that will emit less or zero negative externalities in order to drive other manufacturers out of the industry. Let us take a closer look in automobile industry. Most of the old cars that has diesel engine are more likely to emit more air pollution as compared to cars that uses gasoline. Given that the government would impose higher taxes on vehicles that has diesel engine, consumers would eventually be forced to shift to the use of vehicles that produces less negative externalities. Because of the sudden decline in the demand for vehicles with diesel engine, car manufacturers will be forced to innovate a new car engine that will produce less negative externalities in order to capture a bigger market share. Human beings are individual and therefore should be considered as an individual rather than collective. As a common law, individual who will be caught inflicting physical harm to another person or a group of people will be held liable for the damages the suspect had cause to the victim(s) but not in the case wherein there is no actual physical harm being done to other people. Considering the fact that no one should be held accountable for the negative health effects of smog for which the person did not produce, there should be a clear and well defined criteria which will be considered as a basis for imposing heavy penalty on individuals who will be caught violating the law. Government intervention is necessary when coming up with a well defined property rights on negative externalities. Let us consider the situation in a city wherein the smog created by millions of people who are relying on the use of motor vehicles. Given the fact that smog is a by-product which is produced by economic activities, the government should clearly define a guideline as to when and how the local government agencies could impose heavy penalties on motor vehicles that will be catch smoke belching. In line with this, it is not possible for the government to impose heavy penalties on people collectively. A well defined property rights is necessary in terms of being able to determine or trace the right person, group of people, or company that should be obliged to compensate for causing physical harm either to another person or to a person’s property. In the absence of a well defined property rights, it would be difficult to point out the right person who is behind the production of negative externality. For this reason, market failure is likely to happen. Since most government attempts to correct market failure fail, should governments leave the allocation of resources to market forces? A free market economy is pertaining to one whereby the market forces or the law of demand and supply determines the allocation of the available resources. Even though most government that attempted to correct market failure failed, it is not a good idea for the government to leave the allocation of resources to market forces because it is not possible to leave the allocation of resources purely on market forces alone. Somewhere along the way, the government has to use the fiscal policy or legal intervention as a way of preserving the existence of a free market. Since a free market is highly dependent on voluntary trading, a free market could only exist given that the individual rights of a person will be protected by the government under the private property rights law. In general, human rights are considered as moral principles that clearly define what is socially acceptable or not. For this reason, protecting a person’s human rights is similar to protecting the freedom of the people to decide on what to buy or not buy. Not all businesses are capable of increasing their supply based on the market demand. The case of the farmers is a good example wherein leave the allocation of resources purely on market forces alone is not possible. Because of the lack of financial resources, most of these farmers are not capable of supplying food related products based on the market demand. In the absence of support or protection coming from the government, these farmers will not be able to supply the overall demand for food products. For this reason, government intervention is necessary to correct the market failure of the agricultural sector. Another good example is the case of the wage rates of a country that is currently experiencing high inflation rate. Government intervention is necessary in terms of controlling the minimum wage rates of employees. In the absence of government control, the minimum wage of employees is more likely to increase up to the extent wherein businesses would suffer. If this happens, a lot of small-, medium-, and large-scale companies would be forced to close down. As a result, the entire country would suffer from a serious economic crisis wherein the unemployment rate is relatively high. Leaving the decision on minimum wage rates of employees to the market forces would enable employees to demand for higher salary which is more than what the local businesses could offer. In order to compensate for the higher cost of operation, businessmen are likely to increase the market price of goods and services they offer in the market. Considering that we are currently living in the era of globalization, the high market price of products and services would cause a significant decrease in the demand of goods and services within the global markets. Therefore, most of the export businesses are most likely to suffer from the loss of business opportunity. A similar concept applies to the foreign currency. With regards to the foreign exchange rate, the government should restrict the practice of inter-banking of foreign exchange market including the capital account transactions because of the fact that these practices could significantly interfere with the ability of the market signals to control the exchange rate. Huge fluctuation in the foreign currency could badly hurt the local businesses that are highly dependent on international trading. For this reason, the government should intervene with these changes. Even though it is necessary to liberalised the market prices within the micro- and macro-economic level, it is clear that the government should somehow have a strong control over the allocation of available resources including sensitive decisions related to price and output. Government control over the business practices of the private sector is necessary in terms of protecting the general public from being abused. In line with this, regulating the oil and energy sector is necessary in terms of maintaining a smooth economic productivity, profitability, and increase in the overall economic growth. For this reason, the government should continuously play a significant role in the allocation of financial and non-financial resources at all levels. This applies especially in the case of food and beverages industry as well as the oil and energy sector. *** End *** Total Number of Words: 1,510 Read More