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Saturday, January 29, 2011

Market Failure

Market Failure 

Economists of different political philosophies argue about the extent to which governments need to intervene in the workings of the free market. Free market economists argue that government intervention should be kept to a minimum whilst socialist economists, in favour of more state ownership and control, argue that there is greater need for intervention. One argument where there is considerable debate is concerned with the environment and its sustainability. It is when the protection of the environment is considered that the free market appears to fail on several counts.

Market failure occur due to several reasons
1. Environment as a public good
Certain parts of the environment such as communal land in Zambia could be considered a public good and as such have a characteristic of non excludability. Commonly owned land where there are no established property rights produces little incentive to care for the environment. Slash and burn agriculture or chitemene can lead to deforestation, as cutting down trees incurs no cost given that the farmers are shifting to new areas. However the environment does not conform to the other characteristic of public goods that of being non-rivalrous. Using the land for farming means that the land can not be used for conserving wildlife. The environment is scarce and if the use of environment is free then it will invariable be over-used.
2. The existence of externalities
The production of agricultural goods, horn, ivory, electricity and tourism all involve incurring private costs and yield private benefits. Typically the market price of a good or service reflects these private costs and benefits. The production and consumption of goods and services can involve additional external costs or negative externalities experienced by people other than those who are directly producing or consuming the good. For instance the relocation of people when the Kariba Dam was built or the diversion of water supplies for the benefit of the tourist industry. These spillover effects can also impact on the natural history such as the extinction of species of wildlife. The socially efficient level of output and price would be at a level where these external costs were taken into account. This would result in a higher price and a lower output.
3. Ignorance
Given the limited access to education there is considerable lack of knowledge about the impact of poaching and hunting on the population of many species of animals. Markets fail where the lack of information means that rational decisions are not made. If the communities were educated about the impact of their actions on the level of sustainability then different decisions might be taken.
4. Short term benefit versus long term benefits
Killing a rhino and selling its horn will generate considerable income and give significant benefit to the family of the hunter. However the impact of killing the rhino on future generations is not considered. Self-interest, one of the guiding principles of the free market fails to take into account of the future interests of others. Little if any consideration is given to the future.


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