Market Failures and the Welfare State: An Economic Overview
Market Failures
A market failure occurs when the market is inefficient in allocating resources, leading to negative consequences.
The Volatility of Economic Cycles
Business cycles, fluctuations in economic activity between expansion and recession, are a significant market failure. They directly impact the quantity and nature of jobs within a country.
Public Sector Intervention: Economic Policy
Economic policy encompasses the measures and instruments used by the state to intervene in economic activity and promote national progress.
The Existence of Public Goods
Public goods are those that are not profitable for individual investors but beneficial to the country. Preventing non-payers from using them is nearly impossible.
State Intervention: Provision of Public Goods
The state provides public goods, even if demand exceeds supply, due to their importance to public interest.
Externalities
An external cost is a cost imposed on individuals not directly involved in the economic activity. Conversely, an external benefit is a benefit received by individuals not directly involved in the activity. Externalities are consequences of economic activity that affect third parties and aren’t reflected in market prices.
Public Sector Intervention: Environmental Policy
Key interventions include:
- Establishing Thresholds: Setting maximum pollution limits for companies.
- Taxing Units: A tax directly linked to pollution levels—the more pollution, the higher the tax.
- Establishing Pollution Licenses: Requiring licenses that specify emission limits for pollutants.
Imperfect Competition
Advantages of Free Competition
- Stimulates innovation and technological progress.
- Increases the availability of goods and services at lower prices.
- Increases real wages by lowering prices.
- Facilitates market access for new companies and job creation.
Public Sector Intervention: Defending Free Competition
- Managing and resolving competition-related procedures.
- Arbitration and advisory roles to promote market competition.
- Promoting transparency and accountability.
- Reporting on market competition and evaluating public aid effects.
The Unequal Distribution of Income
Market preferences are primarily expressed by those with sufficient income. Those with less purchasing power have less influence on the market.
Public Sector Intervention: Economic Policy
- Economic policy: Stabilizing function.
- Public goods provision.
- Environmental policy.
- Antitrust laws to protect free competition.
- Economic policy: Redistributive function of income.
The Welfare State
The welfare state is a type of mixed economic system that recognizes basic rights for all citizens.
The Spanish Welfare State
Focuses on:
- Health: Universal healthcare entitlement.
- Education: Compulsory education until age 16.
- Housing: Constitutional right to adequate housing.
The Spanish welfare state provides three types of benefits:
- Universal: Free and available to all upon request.
- Contributory: Available to those who have contributed to social security.
- Social: Benefits for those with limited or no resources.