Market Failure or Government Failure? Robert Lee Birmingham Law - PowerPoint PPT Presentation

Market Failure or Government Failure? Robert Lee Birmingham Law School

The work of markets  Markets direct goods and services to their most desired end use  Send price signals to help future transactions  Advance welfare through Pareto optimal exchange  Markets are a form of regulation

Market failures  Markets may fail in delivering these efficiencies  For our purposes the two key causes of market failure are – Public goods (resource depletion) – Negative externality (resource degradation)

Public goods  Public goods are – Non- rival in consumption such that one person’s consumption does not preclude that of another and – Non-excludable in terms of benefit so it is difficult to bar out access to these goods  Public goods generate market failure because being non-rival and non-excludable the ordinary market incentives attaching to supply and demand cannot promote allocative efficiency  And it can be very difficult to determine willingness to pay for goods received for free  So public goods may be undervalued and overexploited (free riders) – E.g. clean air; landscape

Solutions for public goods  Governmental provision – Economic liberalisation; underfunding  Command and control – Licensing and policing  Market provision – Natural monopoly problem  Cost benefit analysis to protect or produce (more) public goods – Imperfect knowledge and valuation – Discounting  Subsidy – CAP and market distortions

Interventions  Will regulatory interventions be any better than the failed market?  Tax – landfill tax v climate change levy  Command and control (to defined standard) – environmental permitting  Market instruments – cap and trade under ETS  Well defined property rights – Coventry v Lawrence  Government failure may replace market failure

Conclusion  Markets promote efficiency under certain assumptions which are prone to failure  Intervention by regulation then becomes necessary BUT  Devising both the form and the extent of regulation is tricky  We can see interventions that work BUT  Equally there are examples of government failure which we are slow to correct