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Posted: July 26th, 2022
Role Of Government In Correcting Market Failures
Role Of Government In Correcting Market Failures
Governments across the world are increasingly affected by the increased financial system deregulation. Financial system deregulation was brought about by the rise of globalization and propagated across the world in a bid to limit bottlenecks in cross-border trade (NgorNgor, 2014). The resulting phenomenon has been a steady rise in the unpredictability of markets due to greater inclusivity and greater diversification of the financial markets. There is a greater need for government intervention in correcting market error, but this is relative to the economic model adopted by the government and the types of conditions plaguing the government. Effectively governments across the world have been seen to put in place a variety of measures in effect to market failure, including legislation, taxation, provision of subsidies, tariffs, and greater international cooperation among governments. Using 20th century Britain (Liberal perspective) and 21st century America (Conservative perspective) as a case study, the following essay outlines the government’s role in correcting market failure. Using Saint Leo University’s core values in the analysis of the role of government this essay outlines that the governments intervene in correcting market failure through taxation, provision of subsidies, the institution of tariffs, increased international cooperation, and through regulation of the markets.
Interventions By the Government Available
The pursuit for personal development compels an individual to demonstrate a capacity to be self-motivated in order to strengthen the character of the community. A developed community needs an entity to act as an authority and provide oversight for critical intervention. This leads one to be more open to the role of government in the intervention process. The role of government in correcting market failure is dependent on the economic policies governing the general society, the cause, and subsequently the effects that come out of the reactive economic policies. There is greater relativity that defines whether the measures will work. This is effective in creating adept policies for intervention. Market failure is defined by an inefficient distribution of goods and services within the free market, and hereby the individual incentives to harbor rational behavior do not lead to rational outcomes in their context and their resulting social groups (Boyle, 2020). Governments are as such forced to intervene and correct the market failure using a variety of policies relative to the prevailing market conditions.
Market failure, in economics, is a situation defined by an inefficient distribution of goods and services in the free market. In market failure, the individual incentives for rational behavior do not lead to rational outcomes for the group. Government role in preventing market collapse include:
Taxation calls for responsible stewardship and taps into the abundance of resources within an individual’s community, and the power of the collective to achieve a common goal. Taxation is mostly done by increasing taxes collected to boost government revenue in a bid to create avenues that allow state intervention through welfare programs. Taxation usually goes hand in hand with increased social policies in a bid to reign in the individualistic tendencies that come with a neoclassical economic modeled market. Thatcher (1975), however, states that taxation tends to target the rich and increasingly makes the state-dependent on social welfare. Taxation also fails to account for external costs of goods, as taxes affect the prices of goods production and services, increasing the demand for substitute goods from outside sources (Bourne, 2019). This has the potential of collapsing the internal markets and industries.
Governments can provide subsidies. Subsidizing activities in the production sector aim to reduce the transactional cost associated with the provision and sales of goods and services (Bourne, 2019). It works to reduce the probability of direct intervention such as taxation and military intervention (which are often viewed as extreme). Subsidies have external benefits as they help sustain outputs and maintain competition from external players. But generally, economists point out that it is important to calculate marginal external costs and benefits associated with the provision of subsidies so as to have a holistic picture (Stiglitz, 2010). Subsidies dependencies can have a greater effect on government spending leading to greater taxation and regulation of financial markets.
Tariffs are broader forms of taxes charged on foreign imports. They are imposed to increase the prices of foreign goods. This is done to make the imports less desirable than the exports in any country. But research indicates that Tariffs are a form of protectionism that economists have cited to reduce foreign and free trade areas (Partington, 2018). Tariffs work to increase the potential for direct and indirect conflicts between countries and reduce global trade, which has been instrumental in economic growth across the world. The pursuit of excellence demands collective and individual action in critically exploring social problems to find workable solutions. It calls for morally responsible leaders and greater commitment to a larger social goal. Protectionism, as a form of intervention, does not espouse excellence, on the contrary, it nurtures selfish individualistic tendencies that work to undermine respect for other parties and bring about conflict. The use of tariffs as such becomes the least favorable mode of intervention.
International Cooperation between states
International cooperation between countries has seen greater economic collaborations. An example would be the formation of WTO, EU, AU, etc. According to Partington (2018), international collaboration stems from greater nontariff rules in favor of international trade; working to forge domestic policies closer together in recent decades. However, they have the potential to be politicized. Rodrik (2011) outlines that decades of poor public education have resulted in a rise in misinformation with regard to the meaning of free trade and a rise in protectionism, which populist politicians have used to advocate for greater protectionism.
Government, Economic Models, and the Market Place
The West, and particularly the US, has registered a steady rise in the uncertainty of its financial market, while at the same time, a more globally connected system of financial markets, all of which become affected by the financial conduct of other countries. While the role of governments in controlling financial markets under a globalized system has reduced and increasingly become non-standardized across different regions, governments continue to play an important role in reigning market players to abide by regulations. For example, the Chinese economic model allows the government a greater degree of control and regulation of the market so as to achieve certain outcomes (Pieterse, 2010). This is not the same in the West, where the neoclassical economic model is still well regarded and increasingly seen as a bastion of good financial governance.
The neoclassical economic model of growth, as outlined by Margaret Thatcher, outlines development to prioritize deregulation and the free market; it establishes that the government has limited control of the market and establishes value for lesser taxation as a means to promote the idea of lesser regulation and a free market place for all (Thatcher, 1975). Over-dependence on government regulation of the market is defined to perpetuate increased regulation on financial policies, greater taxation, and a society dependent on welfare systems. According to Stiglitz (2010) government has played a very critical role in the development of various economies in East Asia (p. 245). However, a weaker government implies runaway corruption, increased market manipulation, and tendencies for monopoly within the general marketplace. Value for integrity demands members to deliver the promise they made to their society, pleads on honest, justice, and consistency. In a bid for governments to regulate their marketplace, there is a greater need for people with integrity.
In this regard, the role of governments in the regulation of the market is not entirely decried, but it becomes structurally needed to create contingency measures. In the case of market failure, such as the financial meltdown in 2008, the government plays a key role in preventing market total collapse. Subsidies, taxation, market regulation, and international cooperation have been cited as key roles government could enact to limit the increase in market failures, but they have to be carefully implemented. This is because all these interventions have advantages and greater limitations.
NgorNgor. (2014). “Effective Methods To Combat Transnational Organized Crime” In Criminal Justice Processes: The Nigerian Perspective. Retrieved 7 November 2021, from TOCTA Report https://www.unafei.or.jp/publications/pdf/RS_No58/No58_16PA_NgorNgor.pdf
Partington, R.(2018). “Is Free Trade Always The Answer?”. The Guardian, https://www.theguardian.com/business/2018/aug/13/is-free-trade-always-the-answer.
Pieterse, J. N. (2010). Future of Development. In Development theory. SAGE Publications.
Rodrik, D (2011). The Globalization Paradox: Democracy And The Future Of The World Economy. 1st ed., W.W. Norton Publishers.
Stiglitz, J. E. (2010). Freefall: America, Free Markets, and the Sinking of the World Economy. New York: W. W. Norton & Company.
Thatcher, M (1975) “Speech to the Conservative Party Conference 10 October 1975.” In Europe Since Hitler.
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