Microeconomics Describe the role government should play in correcting for market
ID: 1132702 • Letter: M
Question
Microeconomics
Describe the role government should play in correcting for market failures. Make sure to apply Saint Leo’s Core Values to your analysis, remembering that responsible stewardship calls on us to be ‘resourceful’. You should cite specific examples and applications, and take a clear stand on whether you believe the actions of government work towards resolving market failures or not.
This assignment must be a 2-3 page Word Document and use 12 pt. Times New Roman font with proper APA citations. Be sure to review the scoring rubric here.
Explanation / Answer
Answer:
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Dr. Arthur F. Kirk, Jr. (University President) identified the core values of Community, Respect, Personal Development, Responsible Stewardship, and Integrity, which were infused into the university’s academic programs.
University’s value-infused model works on the principle of fusion of the entire community that is providing for the effective college like experiences, where the faculty, staff, and the students are becoming more aware of their personal values and start examining and living those values.
This values infusion into the curriculum acts like a guiding beacon for the students for them to live in contemporary society.
Through this education system, students develop critical thinking skills and better understand the use of the core values which enables them to apply critical thinking and values in their personal decisions.
The value of community fosters a unity and interdependence in the community based on mutual respect and trust which creates a more socially and legally responsible environment. Respect as a value motivates students to unify and respect the diversity of people and foster free ideas exchange and learning, and most importantly living harmoniously.
Personal development value encourages students to develop their spirit, mind and body to lead a balanced life that can in turn strengthen the character of the whole community.
Responsible Stewardship is fostered through the commitment to the community development by using one’s own resources, thus ensuring responsible placement of legal instruments like wills to be in place before they are necessarily needed.
Integrity demands the students, faculty and staff to live the university’s mission and pledge for honesty and consistency in their words and deeds.
Simply put, market failure is the ineffective allocation of resources. There could be various types of market failures. Some common types of market failure include:
Monopoly –
When there is only one company in the market, it can reduce the supply. This will raise the demand supply gap and the company can command very high premiums on the same. This will lead to one key problem - consumer demand will not be satisfied. This is a very common market failure.
Let's try and understand how monopoly can happen:
- Company X might be the only firm producing a certain good.
How government can intervene –
Generally, the government will try to see if there are other firms which start offering similar goods to stabilize the market.
If this is not happening, then the government can introduce a scheme where they can allocate a fund to areas where they see possible market failure happening due to monopoly.
This will lead to entrepreneurs with ideas for similar products to pitch for the funds, gather the funds and stabilize the market.
Another way the government can stop this is by introducing its own line of a similar product at a cheaper price to stabilze the market.
Another way in which Monopoloy can happen:
There are only two companies X and Y producing a particular type of product in a market. Company X tries to acquire company Y by paying a huge premium. This could lead to monopoly.
Even though Company Y might be willing to be acquired, this would clearly lead to a situation of monopoly and thus a market failure.
What the government can do - Whenver an acquisition happens, a government approval is absolutely necessary to enable it. So when the government sees a potential threat of market failure due to monopoly happening through this acquisition, it will not approve the acquisition.
I'll explain one more example and possible government interventions:
Market failure due to de-merit goods:
This happens when potentially harmful goods such as cigarrettes, alcohol etc., is produced in plenty. The failure here is that the health and wellness of many people consuming these goods is at risk.
Also there are many people who consume this passively, by being close to the people actually consuming the goods. The de-merit from these goods is way more than the merits and these markets need to be controlled in some way in order to avoid market failure.
Possible government interventions –
By imposing huge taxes on such goods, the overall maximum retail price of these products goes up. As the price goes up, the demand for these products will slowly go down based on the basics of economics.
This will ensure there is a control on the consumption of these goods thus reducing chances of market failure.
Another possible solution is to prohibit promotion on these products - government can impose bans on advertisements of cigarretes and alcoholic drinks. This can lead to reduction in demand thus keeping the market in control.
Another solution is through initiatives taken by the government –
Making small advertisments/films on the ill effects of smoking/alcohol consumption, mandating cigarrete makers to put "injurious to health" messages on their packs etc., This will also reduce demand and keep market in control.
Thus the government has a huge role in controlling market failure either through price increases (tax), legislations ( bans) etc.,
The core values of Saint Leo's have been imbibed and formed the basis for the response to this question. Only through a having respect for community, pursuit for excellence, being responsible and having complete integrity can the government really be resourceful enough to control market failures.