How Government Interventions to Correct the Market Failure Do More Harm than Good?

To What Extent that Government Interventions to Correct the Market Failure Do More Harm than Good?
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To What Extent that Government Interventions to Correct the Market Failure Do More Harm than Good?
Introduction
Market failure is understood as an event when the market does not achieve the results that society anticipates and thus fails to serve the needs and interests of people from an economic perspective (Marciano & Medema, 2015). Jackson and Jabbie (2019) have defined the concept as the lack of Pareto optimality of the market or an unequal resource allocation resulting from natural monopoly, market power, externalities, imperfect information, or public good. Economists have historically conceived that governments are mandated to avert market failures through various interventions to return the market to its optimal. However, government failures, also defined as a situation where such intervention results in further inefficiencies, instead of abating them are commonplace around the world (Yzbeck & Soucat, 2019). This essay examines the extent to which the United States government’s interventions, including subsidies and incentives, factor price distortion, and public choice resulted in misallocation of resources, social inefficiency, and welfare loss in a bid to correct market failure.
* Theory
* Market failures resulting from misallocation of resources, social efficiencies, and welfare loss
Unfair/unequal or misallocation of resources, social inefficiencies, and welfare loss result in market failures. Unfair resource allocation in free markets results in some members of society being homeless and others in poverty while a few being rich. Contrary, social efficiency is the efficient way of utilizing resources and only occurs at a point where the social marginal cost (SMC) is equivalent to the social marginal benefit (SMB). However, when there is a decline in benefits and the economy of a country, through taxation or imposing a monopoly, the welfare loss is realized. In this scenario, the purchasing power is transferred from the taxpayers to the taxman thus resulting in a higher social cost (Sewell, 2018). In the diagram below the two triangles with blue threads represent the social deadweight loss due to a monopoly that governments support to control the market of new products. The restriction in production of another product due to a government-imposed monopoly leads to market failures. These economic concepts can be illustrated using Fig 1 below shows changes in quantity supplied (Q1, Q, and Q2) and price changes from P1 to P2 as equilibrium shifts to the left.
Fig 1 Welfare loss due to monopoly (Adapted from Sewell, 2018)
* Government intervention
Governments intervene in controlling markets in situations where there are conflicts in transactions between two market players. Using institutional analysis and economic and sociological knowledge, Xiang (2020) has constructed a theoretical model of economic risk transfer into political risk. In this framework, the author describes the relationship between market players and the government, its ability to withdraw from society, and the completeness of law as the main factors that support the process of risk transformation. Resulting from this thought, the government that is often seen as a market regulator and a lawmaker may be seen to deeply engage and intervene in markets. These efforts by the government will have markets functioning differently in terms of supply and price regulations.
* Government failure and causes
As governments intervene, these efforts may result in failures including distortion of price signals, rent-seeking behaviors, public choice theory, unintended consequences, imperfect information, moral hazards, and regulatory capture and regulatory arbitrage. Sun, Chen, and Huang (2020) have shown the negative effects of price distortion on the efficiency of the industrial environment, especially in the western and central regions of China, and propose that governments need to improve the factor of price distortion in optimizing industrial structure in efforts of improving green industries. Rent-seeking and corrupt behaviours are often caused by contestable rents aimed at rent capturing and the social cost is often inferred from the contestable rent value using the missiles seek heat and invertibility hypotheses (Aidt, 2016). Public choice theory and government failures lead to market failures as the misallocation of resources through a political process impact the economy (Fike and Gwartney, 2015). While governments may seem to spend more on the poor, much of the funding goes to the rich, and thus the cost of government intervention can do more harm than good, or the cure to a certain problem may be worse compared to an illness.
* Researched examples of Market failure from a country
* The allocation of $527 million federal loan to Solyndra trough the 2009 stimulus act in a bid to reduce spending and create “green jobs”
Solyndra, a California-based solar company, was forced to shut its operations in 2011 and filed for bankruptcy, due to a collapse of the solar industry market resulting from the plummeting of solar panel prices, a glut in supply, and overall reduction in the company’s revenues (Mulkern, 2011). The former President supported the decision by Congress to support green energy production and transmission through a $527 million federal loan to Solyndra, a move many GOP members saw as a government failure that could result in market distortion. Supporters of such programs have cited motivations such as ending the overreliance on foreign oil, addressing climate change, and increasing U.S. competitiveness through technology and innovation as the president and CEO of the Solar Energy Industries Association, Rhone Resch argued (Mulkern, 2011). Nevertheless, this is an example of the government’s misallocation of resources in an effort to salvage the energy market in the United States (Hocker & Voswinkel, 2019). Economic analysis shows how privately optimal choices can deviate from economically feasible options. The deviations are known as market failures in economic perspectives and result in environmental externalities both from renewable energy sources and fossil fuels (Gillingham & Sweeney, 2010). While unregulated market of harmful fossil fuel will result in overuse of these energy sources and lead to environmental pollution, this also leads to the underuse of other available alternatives such as green energy. Similarly, unpriced and excessive incentives to green energy market will also lead to overuse of the energy or underuse of other energy sources and technologies used in production. When this happens, there will be competition in the energy market where the quantity of renewable energy will increase resulting in the shifting of the supply curve from S to S2 and a reduction in quantity of energy supplied from Q1 to Q2. This will subsequently lead to an increase in cost of energy from P0 to P2 as show in Fig 2.
Fig 2 Incentives...