Market Failures: Government Intervention Assignment

Market Failures: Government Intervention Assignment Words: 668

Dan Mattera September 27, 2010 BUS 345 Essay #1 What is the basis for the contention that governments should intervene to correct market failures? (Be sure to explain what market failures are and why they are significant without providing superficial, rote definitions. ) Contrast this with the argument that laissez faire is preferable to intervention. (If possible, link this to the idea of government failure, the iron law of public policy, rent seeking, and unintended consequences. ) Imagine a grading rubric in which failure is considered everything except perfection.

In the academic world this seems absurd but in economics whenever markets deviate from any of the ideal conditions necessary for perfect competition the result is measured as a failure. Although the term “market failure” seems to suggest some sort of catastrophic collapse such as the recent recession, it actually entails any occasion wherein some net social cost is incurred including such everyday inefficiencies as harmful externalities or the price mechanism departing from a state of equilibrium (Goldsmith 23-25).

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The unpredictable and complex nature of the market has left economists and politicians with a plethora of issues, generating incredible contention over how to mend each of the market’s failures. Those on one end of the ideological scale will usually argue that most market failures are not self-correcting and that some sort of government intervention is necessary.

Generally, their underlying assumption is that intervention is needed to counteract the combined factors of human greed and today’s concentrated distribution of wealth which has created a system so unbalanced that the market cannot always control itself and could instead be driven by those with enough money and power. Those poised to capitalize on such a market are the corporations that account for the vast majority of economic power in this country and, according to most advocates of government intervention, are the main proponents of today’s unbalanced system.

Since the political and social chaos following the Civil War allowed corporations to begin dismantling the strict laws that limited their accrual of power, they have been “restructuring the rules and institutions of governance to suit their interests” (Korten, pg. 60) at an exponential rate. Those who favor government intervention see it as reclamation of control that the government once held over corporations that kept the interest of citizens and society ahead of the shareholder’s (Korten, 61-65).

Despite this incredible accumulation of power some still believe that government intervening on market transactions is a removal of freedom and can too easily lead to the sort of coercion seen in many communist states. Those who occupy this end of the spectrum argue that laissez faire maintains an efficient, innovative and mutually acceptable market system. They also contend that in general government intervention fails at implementing proper public policy to such an extent that they themselves produce a net social cost. For the most part, these government failures are not random.

Perhaps the greatest cause for these miscarriages is human rent seeking which is when individuals exercise state power for the benefit of personal gain or that of special interest groups. This coincides with another cause for government failure referred to as the Iron Law of Public Policy. What this means is that by simply acting to benefit one party the government will inevitably deal out direct or indirect damage to another. The tense relationship between economics and politics has always created divides in ideologies.

When we examine what the role of government should be on our market system it is clear that there are those who believe the system is broken and requires government intervention and there those who believe it is running smoothly and letting in more government will only run the risk of concentrated government power. While both sides point out major flaws in the market and government systems that would suggest their beliefs to be true, the solution to the equation of maximizing social wellbeing is more likely found somewhere in the vast space between them.

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