Understanding Market Failures and the Role of Government Intervention
Keynesian Economics
Keynes argued that during widespread unemployment, natural market mechanisms are insufficient for recovery. He proposed that the state should intervene through spending or actions to stimulate business and consumer activity.
Externalities
Externalities occur when a company’s or consumer’s activity affects third parties, either positively or negatively. Negative externalities arise when those responsible do not bear the consequences or costs. Market prices may not reflect all the positive effects generated by a company.
State as a Corrector of Externalities
a) Taxes and Subsidies
The state can tax activities that negatively affect society and subsidize beneficial ones.
b) Regulation of Activities
The state can restrict activities with negative impacts and promote those with positive ones.
Pure Public Goods and the Free-Rider Problem
Pure public goods are those that can only be offered to all or none. Private companies are not interested in producing them since it is difficult to prevent their use without payment. There is a general consensus among economists that the state should provide public goods.
Lack of Competition
When markets lack competition due to monopolies or oligopolies, producers can impose prices and quantities that do not meet consumer desires. The absence of competition may also lead to routine production processes, delaying innovation and the adoption of new technologies.
Market and Equity
Market economies are productive and efficient in generating wealth, but they can fail in its equitable distribution. Most economists agree that the state should play a significant role in income distribution, transferring wealth from the richer to the less fortunate. The state aims to reduce inequalities through income redistribution, equal educational opportunities, unemployment protection, and poverty eradication.
Functions of the Public Sector and Economic Policy
a) Regulating Economic Activity
The state provides a framework for certainty and clarity in economic relations.
b) Producing and Providing Goods and Services
The state produces public goods and services such as education, healthcare, law enforcement, justice, water supply, and garbage collection.
c) Establishing Taxes
Public spending is primarily financed through taxes.
d) Redistributing Income
The state aims to reduce inequalities in personal income distribution and between geographic areas.
e) Stabilizing the Economy
The state plans and takes action to prevent economic fluctuations from causing unemployment or price increases.
Economic Policies
The state uses two types of economic policies: short-term cyclical policies to stabilize the economy and long-term structural policies to create favorable conditions for economic development.
Cyclical Policies
- Fiscal Policy: The state can increase economic activity by increasing public spending or decreasing taxes.
- Monetary Policy: The central bank can regulate economic activity by setting interest rates or controlling the money supply.
- Foreign Policy: The state can influence the economy through foreign trade policy measures.
- Incomes Policy: The state can take measures to halt price increases for certain products.
Structural Measures
These are long-term policies that require more time to produce desired effects.
Value Judgments in Economic Decisions
Economic analysis and events comprise positive economics, while value judgments and policy recommendations are part of normative economics.
Values in the Economy: Societal Preferences
Modern societies value efficiency, or maximizing production with available resources, and equity, or fair income distribution. Other important values include:
- Economic Security: Protection from economic risks such as unemployment, banking crises, lack of social protection in old age, and business failures.
- Economic Freedom: Allowing consumers to decide how to spend their income.
- Sustainability: Ensuring long-term economic and environmental viability.
- Solidarity: Supporting the unemployed and those in need.