Unformatted text preview: The Global Economy and World Politics Professor Edward Weisband Lecture 9: Market Failures and Collective Goods Heteronomy, Market Failures, and Public Welfare Heteronomy is a form of economic governance that operates "bottom-up" In which individual and household choices, values, and preferences (microeconomic) drive overall macroeconomic efficiencies Bottom-up choices help determine capital inputs by "incentivizing" demand (pull) in ways that promote the kinds of sectoral synergies that lead to economic prosperity Bottom-up choices thus influence the conversion process from capital inputs to GDP outputs in order to generate increased value addedness across diversified sectors Open Markets Incentivizing Demand Sectoral Synergies Efficient Production of GDP Outputs Heteronomy and the Tyrannies of Small Decisions Hierarchy readily diminishes efficiency when hierarchical controls intrude on market capacities to determine the relationship Between capital inputs and GDP outputs On the basis of choices, incentives, and preferences BUT although markets generate macroeconomic efficiencies by means of a myriad of "bottom-up" decisions They do not necessarily remedy the collective consequences Of the tyrannies of small individual decisions That we call market failures Market failures in heteronomous economies arise Whenever market outcomes Reflect individual consumer choices and preferences That fail to satisfy the requirements of public interest and collective welfare Entitlements and Collective Public Goods as Responses to Market Failures Market failures create the circumstances for the interface between hierarchy and heteronomy in the form of regulation Regulation represents government (hierarchy) intrusion on the dynamics of market interaction The tension in economic governance arises as to the balance between economic freedom and efficiency standards on the one hand And government control or restraint on behalf of collective political or social values on the other With respect to GDP outputs or socio-political outcomes Balancing Heteronomy and Hierarchy Open Markets (Heteronomy) Left to their own devices tend to generate Market Failures Thus necessitating Inequity Government Interventions/Regulations (Hierarchy) Inaccessibility Opportunism Guile Entitlements/Redistribution Programs Malevolent Side Effects Contractual Enforcement Leveraged Market Power Judicial Due Process The Power of Special Interests Product Safety Standards Negative Externalities Anti-Trust Legislation Small Business Loans Liberalization/Privatization Public Goods Environmental Standards Disaster Relief Regulatory Predicaments in the Interface Between Hierarchy (Government) and Heteronomy (Markets) What are market failures and when do they arise? What are government responses to them? What is the appropriate balance between open heteronomous markets and government regulation in response to market failures? What are the possible range of political perspectives that arise in determining our assessment of appropriate public policies? To what extent do we wish to advocate expenditure of public revenue and fiscal policies, including progressive taxation, in the name of collective public goods and entitlements designed to offset the consequences of market failures? Market Failure #1: Invitation to Opportunism with Guile The possibilities of opportunism with guile in market interactions lead to the necessity for government disciplines, standards, and rules of law As well as the need for transparency and accountability Especially with respect to tort and liability To ensure the sanctity of contract and of promissory commitments Government responses include the establishment of legal and ethical norms and institutional structures that lead to Contractual enforcement Judicial due process relative to tort and liability Law enforcement Legal oversight Market Failure #2: Structural Forms of Inequity and Inaccessibility Heteronomous markets respond to individual or household economic decisions on the basis of market power To "play the game" of heteronomy, you need access to income Access to income can be determined according to structures That advantage some groups while marginalizing others Promoting inequity in terms of structural segmentation And leading to different capacities to exercise choice through markets and to contribute to demand in ways that influences GDP output To Be Continued Wednesday... Government Responses to Inequity and Structural Segmentation Government responses to inequity and inaccessibility include: Entitlements/Redistribution Programs Unemployment Insurance Social Security Healthcare Universal (Europe and Canada) Medicare and Medicaid (US) Public Education Scholarship Programs Progressive Tax Structures But even here, there are wide variations across national economies Market Failure #3: Malevolent Side Effects of Business Decisions The malevolent side effects of business decisions exercised by firms in heteronomous markets Include the failures to compensate the victims Of corporate actions or policies As in the case of industrial accidents Such as Union Carbide in Bhopal or the Exxon Valdez oil spill The problem is the absence of governance mechanisms That create standards of corporate liability With respect to the malevolent side effects Of doing business in national, international, and transnational markets Government Responses to the Malevolent Side Effects of Business Decisions Government Responses Include: The establishment of intergovernmental organizations, regimes, institutions, norms, treaties, and conventions Juridical redress in tort and liability Product safety standards National: Food and Drug Administration (FDA) International: The Codex Alimentarius Commission (CAC) Labor regulations National: Occupational Health and Safety Association (OSHA) International: The International Labor Organization (ILO) Environmental standards and norms National: The Environmental Protection Agency (EPA) International: The United Nations Environmental Program (UNEP) Market Failure #4: Leveraged Market Power Market power can become leveraged by size and financial power Examples: monopolies (Microsoft), oligopolies (GM/Ford/Toyota/Honda/Hyundai/Nissan), monopsonies (Wal-Mart) Size overwhelms process leading to the following: Unequal bargaining power Asymmetric information Barriers to entry Volatile business cycles Government Responses Include: Small business loans Anti-trust legislation International free trade agreements To maintain open and competitive international markets Market Failure #5: The Power of Special Interests Market power does not necessarily reflect productivity Excessive market power is often exerted by and through noncompetitive market forces and economic actors This leads to imbalances between markets and governments in which private interests dominate public legislation and policy making Examples: Congressional Earmarks Protected sectors Agriculture (cotton) Steel Automotives Utilities Government Responses: Increased liberalization and privatization In ways that balance equity and efficiency Market Failure #6: Negative Externalities Negative externalities may be defined as: The costs of market exchange That are not factored into the price paid by end users The prevalence of externalities in heteronomous markets Represents a major risk of heteronomous governance Negative externalities are particularly linked to environmental pollution and ecological degradation Government Responses to Negative Externalities Government Responses Include: Public Goods Roads Hospitals Pollution control Waste management Disaster Control Fire suppression Disaster relief National security The Problem of Negative Externalities A Case Study on Market Failure The Costs of What is NOT Paid Pollution as a negative externality Is measured by the COSTS That are not incurred by producers that generate it As well as by the prices not paid by consumers For purchases of goods and services that pollute Negative externalities arise either As the direct impact or as the secondary side effects Of economic activities and market choices That involve direct pollution from automobiles, factories, or effluence Or indirect pollution as in the case of climate warming Negative Externalities: Some Gain While Everyone Loses To understand market failures, we need to understand negative externalities That operate within market pricing mechanisms The COSTS of pollution as a negative externality And the prices paid to remedy environmental damage Are transferred to the society as a whole Negative externalities are the COSTS NOT paid by producers who pollute and who benefit In terms their competitiveness Negative externalities are the PRICES NOT paid by the end-users or buyers Who benefit from lower prices Examples of Externalities Examples of externalities include: The price of an SUV does not include traffic congestion, air pollution, or high rates of fatalities to others involved in automobile accidents The price of cigarettes does not include the medical costs generated as a result of secondary smoke The price of a computer does not include the disposal costs in material e-waste International Market Failures National governments use Regulations, incentives, and entitlements To counter market failures However some market failures Such as pollution Do not stop at national borders Therefore, national governments have formed International agreements Such as the Kyoto Protocol To address international market failures Through a combination of regulations, incentives, and specialized markets Markets to Counter Market Failures Since market efficiencies are limited by the size of markets One way to counter market failures Is for government regulation to establish market incentives and caps That create new forms of credits and debits to limit the extent of failure As an alternative to imposing "benchmarked" pollution limits by means of regulations that threaten productivity and employment Pollution credit trading represents A market designed to resolve a global market failure Within national and international scapes Opening a Market to Counter Market Failure: The Protocol Step One: The Cap The government sets an overall "cap" on aggregate emissions of any pollutant Step Two: Allowances Government regulations create and distribute "allowances" among firms within polluting sectors Step Three: Markets Firms then "bank," "buy" or "sell" their allowances depending on the pollution amounts each emits relative to the overall cap Opening a Market to Counter Market Failure Continued... Step Four: Market Scarcity Governments impose additional regulations that reduce emission allowances available to firms -=This Permits The Entry of Additional Actors= Non-governmental organizations (NGOs) purchase allowances from more efficient firms And refuse to sell their allowances to less efficient firms This creates market scarcities for allowances that make them more expensive or impossible for polluting firms to buy Thus leading to further incentives or market pressures to stop polluting Opening a Market to Counter Market Failure Continued... Step Five: Value-Addedness in GDP Output As a consequence of combining regulation with scarcity and higher prices for pollution credits Incentives are created that prompt firms to pursue The research, development and implementation of new kinds of value-added specialized capital inputs That include emission-reducing technologies in the production of GDP output This works nationally in relation to C02 emissions And internationally in relation to the Kyoto Protocol The Logic of Open Markets Whenever national governments create artificial international markets To counteract market failures They verify the validity of the linkage Between market efficiency and market size WHY? Because they extend the efficiencies of heteronomous markets across national borders in ways that reinforce market efficiencies internationally ...
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- Spring '08