Why should the government intervene in situations of market failure? Include your example enough economic analysis and tools that the course content is reflected. This is an opportunity for you to “bridge” the material on regulation with aspects of market failure and with what we have been reading about corporate social responsibility. Please do not include “macroeconomic” based answers as this has not been part of the course content. Also please include an example. Again the expectation is that you will include thoughts about market failure, regulation, and corporate social responsibility within the context of an example you create and document.
Answer – According to Friedman, the important responsibility of a businessman is to earn as much profits as he can by conforming to their basic rules of the society, both those embodied in law and those embodies in ethical custom. For example, the manager of a corporation such as hospitals or schools may not earn much profits from their operations as their focus is on providing services to the society. In fact, the manager who owns the corporations have the clear criterion of performance where voluntary contractual arrangement exists. Over the centuries, it has been debated by many economists and politicians that whether the government should intervene in the workings of the private companies in the economy in order to regulate them with more efficiency. In real world market situations, it has been impossible for the private business to function smoothly. For example, it is mandatory to maintain sovereign in the economy to create a strong military in the country which can only be done by the state. Moreover, government also plays role in setting the minimum wages and price in the market on the basis of the supply and demand situations in the market. It has been done in order to avoid the market failure in the society and to make them function smooth. In April 2012, the “Rebuild America Act” was introduced by Sen, Tom Harkin as an extended help to the American manufacturers and also to help the young Americans to get more education. It basically provides financial help and the tools to rebuild more and more bridges, roads, schools and job training facilities and more such opportunities and protect many U.S companies from other predatory and monopolistic trade practices. Hence, we can understand the importance of government intervention here in the private economy in order to make them stronger by regulating and introducing more rules. The businessman has other corporate social responsibilities as well apart from just raising their profits. Otherwise, it would become difficult for him to survive in the society in the long run. Government always keeps an eye on the operations of the business and their socially optimum output and keeps on regulating the market by introducing several acts so that market does not fail. (Friedman, September 13, 1970 )
Government also provides health insurance benefits to the society which is necessary to create a healthy background of the people in the economy. In this way, government not only forces business enterprises to perform their social responsibility but it also performs and provide several services to the society. In case of market failure situations such as monopoly power, externalities, public goods, etc. the government interferes and make changes in the workings of the market so that the market does not fail. In order to avoid monopolistic situation government has created several regulatory bodies such as OFGEM, OFWAT and ORR. They regulate the workings of the gas and electricity markets, tap water and railways. Taxes such as Pigouvian Tax have been imposed in the case of negative externalities so that businesses concentrate more on the socially optimum output.(Assaf, 2011)
Assaf, D. (2011). GOVERNMENT INTERVENTIONIN INFORMATION INFRASTRUCTUREPROTECTION. CRITICAL INFRASTRUCTURE PROTECTION, 1-15.
Friedman, M. (September 13, 1970 ). The Social Responsibility of Business is to Increase its Profits. New York: The New York Times Magazine .