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Correcting market failure

Explore the role of government in correcting market failures, analyzing hierarchies, subsidies, and regulations. Unveil reasons and consequences when states fail due to rent-seeking, special interest groups, and inadequate feedback. Discover the balance between state intervention and market efficiency.

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Correcting market failure

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  1. Correcting market failure • Hierarchies, bureaucracies and other consciously directed institutions have evolved to coordinate people when the market does not. • Public decision making replaces the market through • Subsidies such as tax breaks and loan guarantees • Regulations

  2. The state • The American state is not unitary. Federal, state, and municipal

  3. Can the state make things worse? • “Market failures are pervasive; it is only under exceptional circumstances that markets are efficient. The issue for the appropriate role of government is to identify the large market failures where there is scope for beneficial government intervention.” (Stiglitz, 1989:38).

  4. How states fail

  5. Why states fail • Rent-seeking as result of… • Special interest group • Inadequate feedback • Office seeking • Voting • Unintended consequences

  6. Rent seeking • Payment to a resource owner above his or her opportunity cost • Licensing, franchises, permits, tax breaks, subsidies, and tariffs.

  7. Special interest groups • The organized win over the disorganized

  8. Inadequate feedback • Government agencies do not have a clear bottom line • Acquired rights (entitlements)

  9. Office seeking • Moral Hazard • Favoring those organized vs. those who are disorganized • Short term views

  10. Voters and elections • Avoiding controversy • “Free riding” • Prisoners dilemma (outcomes that hurt the group)

  11. Unintended consequences • Industries that are regulated sometimes capture the public agencies doing the regulating, and twist regulations to their own end.

  12. The NGO alternative

  13. A tempered view of the state • Most of the time the state does not make things worse • Type 1 error is not that rampant • The state is subject to the laws of competition • Just as good intentions go awry, the obviously “bad” things about rent seeking can have positive (though not intended) consequences.

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