Saturday, March 22, 2014

Market Failure vs. Government Failure, Part 4

Market failure can be created by everyone and anyone in this planet, anytime and anywhere. For instance, person A will demand a USB/flash disk with 100 GB memory sold for only P300. Person B may demand for the same product for only P400 (their “willingness to pay”) and so on. There is a demand for that product. Where is the supply? Zero at those prices. There is no market clearing price as its current price could be several thousand pesos now. Market failure.

Person C has invented through biotechnology a tilapia variety that can grow to commercial size within a few weeks and selling the fingerlings at P50 each. No one buys as the price is deemed too high. There is supply for a particular product but demand is zero. Another market failure.

In both cases of market failures, should government intervene as often advocated by many sectors, that government should come in anytime anywhere where there are clear market failures?

Nope. There are millions of unmet demand  every day in this planet. And conversely, there are also millions of unmet supply every day in the planet. It is simply impossible both for technical and fiscal/financial considerations for government to come in for each of those market failures. Market solution to market failures can occur within the day or within a year or within a decade or century. Where there used to be market failure several years ago, there is market solution by now, or next month.

An economist friend, Prof. Nandy Aldaba of Ateneo Economics Department, noted that

The Philippines has P 1,025 Billion for all the Departments. We want job generation for inclusive growth and the Departments in charge are the poorest: NEDA, 5 Billion and DTI, 2.8 Billion…  DA has a very big budget - 63.7 Billion but with all the corruption in this agency, nothing much has happened to our agricultural sector. 

I commented that we do not want government as currently the biggest employer to become “biggest-est” employer. Nandy agreed and added that even in mainstream economics, market failures such as coordination failure and externalities need government intervention, and would  require sufficient resources.

He is right, and in mainstream economics, it also says that market failure is only a necessary but not sufficient condition for government intervention. Because frequent intervention often introduces government failures, solutions that can be worse than the problems they intend to solve. Whereas market failure invites market solution.

The single biggest job that government can do to encourage more private sector and civil society employment, plus self-employment, is to have strong rule of law system in the country. Contracts should be respected and enforced and people will have long term faith in the economy.

This is not to say that "we abandon all government interventions." No, no, only anarchists would say that. Having rule of law, like impartial and credible courts, police and justice system, stable policies, is one important form of government intervention that must be pursued.

It is important that people should recognize that frequent government intervention to correct any perceived market failure is counter productive. Very often, it would help if government will intervene less, regulate less, in addressing certain market failures, real or imaginary. Regardless of the people or personalities in government that we put in.

See also: 
Evolution of Market and State, October 25, 2005
Market Failure vs. Government Failure, June 07, 2006 
Market Failure vs. Government Failure, Part 2, March 03, 2008
Market Failure vs. Government Failure, Part 3, June 23, 2010

Market segmentation and pricing, October 09, 2007
Limits to Free Market?, November 16, 2007 
Pol. Ideology 10: Joe Stiglitz and the Market, December 16, 2008
The Pope and Capitalism, December 03, 2013
Are Markets Moral?, January 05, 2014

No comments: