After reading chapters 5 and 6 and Special Topic 5, write a 2-page paper describing the importance of competition in markets. How does a lack of competition affect prices and output? Describe what the role of government is in markets vis-a-vis firms in the market. Market Failure Whenever we consider the implications of scarcity and the imperfect market structures that exist in our society, what do we expect out of a market system? What do we expect out of government? Governments and the people running them are imperfect, so what is expected there? Can markets achieve efficiency and equity at all times and for all people? What role does government play when and if markets move away from full efficiency and equity? These are some of the key questions empirically we ask and attempt to answer in economics. In most situations, the more competitive markets are, the more efficient and equitable they will be. As we learned in the previous section about price floors and price ceilings, efficiency losses in an economy can manifest when underproduction or overproduction occurs. We can assert that economic efficiency is represented by marginal cost and marginal benefit being in equilibrium. At a point on the marginal benefit curve above the equilibrium point, that is where underproduction would occur since marginal benefits outweigh marginal costs. On the other hand, if the price is above equilibrium on the marginal cost curve, overproduction occurs. Market Failure Because there are efficiency losses, collusion, and less than perfectly competitive markets, market failure occurs. Underproduction produces benefit losses, while overproduction produces too much and costs in the opposite way. The market power of firms in which a lack of competition gives firms the ability to manipulate supply and output to achieve the desired revenue price can lead to deadweight losses and negative externalities (costs to non-consenting individuals, firms, or countries). While public goods, which consist of non-rival and non-excludable goods available to all in the public, can lead to inequity due to the free-rider effect of some individuals, firms, or countries exploiting the use of those goods for which they did not contribute the resources making the goods possible. Government Failure As a result of market failure, the government’s role tends to expand. Inherent to the role of government is the protection of individuals in society. That protection not only takes the form of military, police, fire, and other entities whose roles are to protect society from physical harm, but protection by the government is also overseeing markets to ensure market competition is highest, collusion is lowest, and equity and fairness occur through the market exchange process. Government failure can ultimately occur if actions were taken by the government actually lead to misallocation of scarce resources or less market efficiency and equity. In summary, markets seek equilibrium and will achieve greater efficiency and equity when competition increases and markets are close to or at perfectly competitive. However, it is rare perfectly competitive market competition occurs. Market failure does transpire when firms exercise market-power pricing and output, underproduction or overproduction is carried out, negative externalities are present, and when public goods lead to free-rider effects. Pareto inefficiency (one person is made worse off when one person is made better off) transpires thereafter, encouraging more government intervention in markets and economies. When government actions and/or policies lead to more market failure, then government failure ensues. Market Failure Due to imperfect markets, consumers, governments, and scarcity, market failure is expected at times. Market failure occurs when markets don’t achieve complete efficiency and equity. What leads to a higher government failure rate? Because the size of the federal government in particular has grown in size consistently since the Great Depression of the 1930s, the benefits sought after by individuals and firms from government has risen too. There are differences in government systems and market systems, but there are many similarities too. Just as market power and collusive actions in markets lead to market failure, so too do those kinds of actions lead to government failure. Markets and Government Systems When we compare and contrast markets and government systems, what are some of the differences and similarities? · Competitive behavior is present in both market and public sectors · Scarcity imposes the aggregate consumption-payment link in both sectors · Private-sector action is based on voluntary choice; public sector is based on majority rule · When collective decisions are made legislatively, voters must choose among candidates who represent a bundle of positions on issues · Income and power are distributed differently in the two sectors · Self-interest is present in both government and market systems Gwartney, J., Stroup, R., Sobel, R., & Macpherson, D. (2013). Macroeconomics: Private and public choice. (15th ed.). Mason, OH: South-Western, Cengage Learning. As we discussed in earlier lecture points, markets can improve in efficiency and equity when competition increases and gets closer to perfectly competitive, when collusion is reduced and/or eliminated, and when markets are in equilibrium between demand and supply (aggregate demand and aggregate supply). Similarly, government systems can improve in efficiency and equity when voters’ interests are fully considered, spending and costs are allocated prudently, and when economic and political harmony occurs. To summarize, as competition decreases in markets, market efficiency, and equity fall; market failure increases. When the size of the government expands and the processes within government systems fail voters and create more marginal costs than benefits, government failure increases. Market capitalism is compromised ultimately when government failure rises due to the following: · Special interest · Interest groups · Uninformed voters · Logrolling · Shortsightedness effect · Rent-seeking · Widespread use of taxation, spending, and regulation · Public officials spending other people’s money Gwartney, J., Stroup, R., Sobel, R., & Macpherson, D. (2018). Macroeconomics: Private and public choice. (16th ed.). Mason, OH: South-Western, Cengage Learning.
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