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What are the sources of market failure? How can these failures be tackled by the policy makers?
The present stage that the world has reached is one in which everything is close-knit. The world has seemingly become smaller, and distances have been shortened thanks to technological advancement. There are several bodies and structures that interact with one another and this interaction appears to be systematic. Speaking of systems, globalization is one; it is a phenomenon that has many countries, organizations and institutions operating together. Each of the components in the globalization process exists for its self and is self-driven, yet the system functions. In this regard, one might assert that markets of different types and sizes function in a similar manner. They interact and influence one another in such a manner that it sometimes is difficult to trace out their patterns.
At the center of globalization are particular factors that keep it in motion. One of these factors is consumer behavior that is largely driven by the availability of products and services in various markets. These influences of these vary in intensity depending on their location as well.
Consumer behavior is considerably dependent on promotion of products; the manner in which products are promoted directly influences consumer behavior. Each medium used for promotion has its own impact, and the one that is believed to have a tremendous impact is the Internet.
From this era began the shift towards an improved way of life that would take countries into an entirely different era. This era today is called globalization, a phenomenon that brought many parts of the world together through faster communication systems.
Globalization has in fact resulted due to factors such as communication systems being boosted in recent years. This is also the reason why the present age that people live in is called 'the age of communication'.
The world in which one lives today is indeed a fast-paced one. This fast-paced environment has evolved because of various actions, each of them interacting and producing a variety of results, and creating effects that favor the markets today. This may all sound complex, but in truth, it may be simply described as a vast number of actions causing a very situation that one witnesses today. This complex situation does not mean that there is total chaos because there is in fact an organized system in place. This organized system is one that helps many countries stay in contact with each other. However, the system is not one that favors friendship, but actually focuses on economic gains through self-interest; countries are motivated in this system to work towards their own gain. They stay in touch with each other for the purpose of suiting their own needs. It is obvious that they would not do things on a charitable basis for another country when they could actually invest time and money in bettering their own conditions. Due to the availability of the Internet, countries are able to remain in close touch and trade easily.
It is clear that the market situations one witnesses today are a result of the policies that have permitted the condition. Free market policies are known to have promoted speedy trade that might have gone out of control (Scott, 2003). This can be argued from an integral viewpoint of globalization. Globalization is a macroeconomic phenomenon, but within it, the microeconomics functions are at the center of determining the survival and success of markets. Should more and more markets fail, globalization as a macroeconomic phenomenon is weakened. This results in prices rising, unemployment, etc. that add to it as well as the stress of other markets linked to a given market.
Some scholars believe that uncontrolled market forces are unhealthy and need to be controlled by state law. As opposed to this, it is known that these days free market trade is widespread. This means that markets get to function in a random fashion; trade is not really watched over, which could lead to inappropriate balances in the economy (Francis, 2005). An example of this is a third-world economy where markets continuously import items. For example, a particular market in a country/city-A may go on receiving services and good from food chains from another country/city-B. In the long run, the fast food market suppliers in country-A will lose out. In other words, the market for local suppliers will be sapped; people will not want to avail their services if the prices and quality are more or less the same in comparison with the food chains.
Another point worth considering is: should country-B discontinue its services in country-A, there would be nothing to go on with. The fast food market there would be at a loss, and would have to start from the very beginning. Quite obviously, the free market would be to blame. This is because of the fact that under the free market policies there is no way of curtailing intrusion of foreign services and products. The same kind of intrusion could apply to US markets where more affordable vehicles could be imported from places such as Japan. However, this has not occurred because of the tastes of the people generally.
The views expressed above are seemingly Marxist in character, but are of course not entirely so. This is because of the fact that there other non-Marxist writers concerned with the free trade policies. They believe that the trade policies on open market trade and free trade need to be controlled to an extent in order to prevent tings from going out of control. Basically, since the problem lies in the fact that there is random action going on, this needs to be curtailed. The manner in which this could be curtailed depends on how the lawmakers think. This apparently seems to be where the bulk of the problem lies because it is thought that the elite do not want the policies to change. It is thought that globalization is a process which has a strong backing of the elite class, and to a large extent, only serves their interest (Francis, 2005). Furthermore, it is thought that they themselves have made an impression that globalization not only is unavoidable, but it also has been a great success. To many this is a very misleading idea and history is a proof of the fact that there was an earlier time period, almost around a century ago, when economic globalization was broken down and severely damaged by World War I and then completely crashed in the Great Depression.
The lesson which the First World War gave to many Europeans was that interdependence was a fair-weather system. In times of war, crisis and economic dislocation the system proved unstable and nations were helpless. As a result, the pendulum swung away from laissez-faire and de-regulation towards a greater government intervention.
The point made here is not to argue against globalization or to argue against its sustainability. Rather, it is to assert that all that takes place through it cannot be guaranteed as a universal law. Hence, there has to be some form of state control to prevent problems in the wake of unforeseen circumstances (Scott, 2003). If one is to take the above example of the fast-food market, it can be observed that the local market would be shattered if globalization is affected by factors such as war. However, if there were some form of control over market policies, there would not be much risk ahead. The control mentioned here refers to a significant amount that is required in order to prevent local markets from becoming too dependent on external sources of services and products. Such an inclusion in market policies would help I the stabilization of economies as well as reduce the risk involved should there be a calamity. Take the attacks on the WTC on 11th September 2001 for instance; everything communication with them was cut off for a significant period, and resulted in losses on both sides. If there were to be disasters such as these or worse in the future, a great deal of revenue could be lost. Hence, market and trade policies need to be rethought in order to prevent these kinds of things from happening.
The role of policy makers today includes re-thinking the possible impact of failure in the global system. They need to understand that the global system is susceptible to breakdowns, and there needs to be a backup plan for it. There needs to be consideration for the underdeveloped countries especially because of the fact that their economies are weaker and might not be able to withstand any catastrophe. Since the policies are made by those who virtually control the economy, they need to be careful and more considerate as well towards those that are on the receiving end. This is important because the rest of the world is dependent on them, as they are world leaders. Quite naturally then, they are expected to demonstrate their leadership in terms of policy framing as well as global stability that comes along with it.
References:
Carnoy, M. et al. 1993. The New Global Economy in the Information Age, Penn State Press.
Francis, R. 2005. Market Failures: Links for economists and historians of economic thought. http://www.datacomm.ch/dbesomi/Links/links-10.html
Scott, R. 2003. The high price of 'free' trade; November 17, 2003 | EPI Briefing Paper #147. http://www.epinet.org/content.cfm/briefingpapers_bp147
Thomas Lairson and David Skidmore, International Political Economy: The Struggle for Power and Wealth, Harcourt Brace, 1997, Chapter 5
Topic 9 General Equilibrium, Market Failure, and Policy. 2005. http://www.chass.utoronto.ca/~reak/eco100/100_9.htm
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