Market Failure
As it is known, contemporary world endures the process of economic liberalization and globalization. While this phenomenon is considered to beget a number of positive tendencies, it has certain adverse effects that arouse concerns of the global community. In particular, neo-liberalism leads to the conflict of interests between governments and businesses. This issue is topical in the modern world. The inability to successfully solve such conflicts results in market failure. For instance, one of the biggest contemporary market failures is climate change. This process is global and hardly reversible. At the very least, it requires much time, joint efforts and money to solve the negative implications of caused environmental damage. It is appropriate to accentuate that the costs of climate change are immense. It is hard to calculate the exact amount of money because it includes direct costs, indirect costs and anticipated costs of inaction. Nevertheless, the global financial damage is approximately calculated and amounts in $40 trillion. What makes the things even worse is that the issue of climate change is reinforced by another manifestation of market failure -free trading. In this regard, one should clarify that free trading is supposed to have positive effects on the economies of both developed and developing states, facilitating international trading. Nonetheless, in reality, this approach is noticed to cause more costs than benefits. This paper aims at observing the Market Failure Theory to enhance knowledge about the important contemporary politico-economic issues that are stipulated by economic globalization.
To begin with, it is necessary to emphasize that economic liberalization presumes limiting government's intrusion into the businesses world. Most part of the property is in the private ownership, and the state does not control the tendencies that emerge in the private sector. Although, when the market experiences difficulties, the state is expected to intervene with the purpose of assisting and preventing failure. The experts believe that the problem of neo-liberalism is that the government should have more rights to intrude into the private sector to assess, foresee and anticipate plausible complications. Instead, in the modern world, the government reacts to the market failure after its occurrence. It means that, at this stage, a country experiences economic issues that require much more time and efforts to be solved. The understanding of this idea is crucial because the absence of timely assistance indirectly contributes to market failure. In particular, it refers to the discussed politico-economic issues of climate change and free trading. Striving to comprehend the nature of market failures, one should observe the relations between the private sector and government.
The fact is that free markets do not provide public goods, whereas, governments may not have enough means to cover the costs of public goods. Otherwise, this approach may be realized when it is too late (after a market failure has already occurred). It is necessary to emphasize that public goods are critically important for social development; if this process is affected, the market failure occurs because businesses heavily depend on their stakeholders. Providing an example of public goods one can mention "street lighting or lighthouses". Considering that these items are in common property and serve to create benefits for all parties, free markets are not interested in creating public goods. It is not surprising because they use only a small part of the advantages provided by the public goods, whereas, the costs of their creation are quite high.
A conjunctive issue is "under-supply of merit goods". To merit goods one can attribute such public services as education, medical treatment, arts (picture galleries, opera and others). These services are important for the development of the proper workforce. Besides, as in the case with public goods, the under-supply of merit goods becomes a strong challenge for the markets, which may even lead to their failure.
Moreover, market failure may occur as a result of "over-supply of demerit goods". These are harmful or potentially harmful items, such as alcohol or cigarettes. On the one hand, the government should not intervene in the performance of markets. Nevertheless, if their performance leads to over-supply of demerit goods, it may eventually turn into a market failure because demerit goods have a significant adverse action towards people's health. The above-described processes illustrate the relationship between governments and the private sector. Specifically, they depict the nature of the conflict between businesses and state. Despite the highlighted conflict of interests, these parties have a common interest: to avoid market failure, which would create favorable conditions for economic growth.
In these terms, it is also necessary to mention "the existence of externalities", which are tangible or intangible items that occur as a result of businesses' performance. The externalities can be positive or negative. In particular, negative externalities of production are mostly known as environmental issues. Consider the explanation, the process of manufacturing creates negative externalities by polluting the air, water and land, as well as creating sound pollution that threatens the neighborhood fauna. Simultaneously, there are negative externalities of consumption, for instance, the excessive use of private transport increases CO2 emission, which deteriorates the situation with the Green House Effect.
In contrast, one should distinguish positive externalities of consumption and production. For example, positive externalities of consumption can be created during workflow when employees receive free training. In this case, it is appropriate to state that the private sector creates positive externalities by advancing professional and personal skills of the locals. It refers to the externality because, apart from being useful for a concrete firm, the obtained knowledge can be implemented at other jobs, whereas, their owners would not have to spend time, efforts and money for identical staff's training. As a result, these positive externalities of production serve to enrich the entire community.
As for the positive externalities of consumption, this concept often refers to the consumption of merit goods, such as education, healthcare and other services. Consider the example, when people consume heath services they improve their health. It means:
if people are healthier, then they will not pass on illnesses so that other people around
them are less likely to become ill, and a healthier workforce means that the economy
will be more productive, which may be to the benefit of the whole population.
Given the above-mentioned, it becomes clear that markets should care to lessen the creation of negative externalities, whereas, governments must encourage businesses to create positive externalities and eliminate the production of the negative ones. Nevertheless, in practice, this balance is hardly achievable, which results in market failures that are equally dangerous for the economies of the developed and developing states. The next paragraph will discuss the climate change and its economic costs from the perspective of Market Failure Theory.
Climate change can be rightfully considered as the biggest global market failure. To support this claim, one should refer to the statistics. The main manifestation of climate change is the Green House Effect. As it is known, CO2 and other elements create a dense dome that complicates heat dissipation and, as a result, the global temperature is growing annually. This negative tendency has many outcomes. Currently, the most urgent one is Sea Level Rise (SLR), which leads to considerable financial losses. For instance, for the 22 European coastal states "the value of the economic assets within 500 m of the coastline is estimated at € 500-1000 billion". Comprehending this data, it is necessary to clarify that, approximately, it is estimated that until the end of the 21st century, the level of sea water will rise for 0.18m-0.59m. Apart from direct and indirect costs of climate change, there is the cost of inaction, which is expected to be the highest. In particular, "the estimated annual cost of inaction aggregated at EU level and primarily linked to coastal flood-risk and erosion is close to 6 billion in 2020". Linking this data to the Market Failure Theory, one can rightfully deduce that economic costs of climate change are the market failure created by the immense and worldwide production of negative externalities.
What makes the things even worse is that the last year is marked with another market failure -low oil prices. Undoubtedly, this fact causes great financial losses for the states that produce oil. However, in terms of climate change, cheap oil has a significant adverse impact on the entire world. Consider the rationale, "it promotes increased use of carbon fuels at a time when we should be investing massively in substitutes". It is natural to suggest that the increased release of carbon belongs to the above-discussed negative externalities of consumption. Given the magnitude of climate change costs, one should accentuate that this negative externality affects the global community, not only the coastal states. At this point, governments should intrude into the private sector to prevent further deterioration of environmental issues. Otherwise, the revealed prospected economic costs of inaction may increase.
Nonetheless, considering economic globalization and various international conflicts of interests, the endeavor to stop the production of negative externalities of consumption, in particular, the Green House Effect and SLR, is quite challenging. Partially, this task is complicated with the free trade agreements. It is estimated that this approach caused global financial damage that amounted in $8 trillion. Probably, the most known example of the free trade agreement is Trans-Pacific Partnership (TPP). This organization is supposed to unite "the United States with Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam (the TPP-9) across a variety of economic platforms". Besides, Japan, Canada and Mexico are also expected to join the TPP. As a result, the TPP will become "the largest trade bloc in the world, encompassing some 700 million people and about $26 trillion USD in various forms of economic activity”.
Considering the current and expected magnitude of the TPP, it is not surprising that its intentions and performance evoke reasonable concerns. For instance, it is presumed that this bloc will "enable environmental degradation by transnational corporations. Besides, it will require aligning the local legislative systems with the set universe standards that pose a threat to states' sovereignty. Scrutinizing this insight from the perspective of Market Failure Theory, one can rightfully conclude that legislative modification will limit the rights of governments. As a result, the states' right to intrude into the private sector with the purpose of limiting the production of negative externalities will be deprived or significantly lessened. Undoubtedly, it is a negative tendency. Firstly, it will deteriorate the environmental issues. Secondly, it may encourage the creation of demerit goods and/or under-supply of merit goods.
The issue of free markets can be well-illustrated with the example of free trade agreement between the USA and Australia, which is claimed to create more damage than good. Specifically, Australian government applied to the preferential liberalization of its economy, making trading relations with the United States become a priority. As a result, by 2012, "the agreement was responsible for reducing — or diverting — $53.1 billion of trade with the rest of the world by 2012". It means that free trade agreement had a negative impact on the economies of the discussed countries as well as on the rest of the world (suppliers and previous trading partners).
Summing up the above-mentioned, it is appropriate to conclude that neo-liberalism and economic globalization create a number of factors that contribute to market failures. Economic liberalization begets the conflict of interests between government and the private sector, and the inability to effectively manage this conflict leads to market failures. The most topical and immense today's market failure is climate change, which is most strongly manifested with the Green House Effect and SLR. The direct and indirect costs of these environmental issues as well as the costs of inaction are quite high. Climate change negatively affects the entire world and, in particularly, complicates the performance of businesses. Besides, economic costs of climate change are increased by the conjunctive market failure -free trading, which limits the rights of local governments for intrusion in the private sector. As a result, both developed and developing states suffer from the production of negative externalities, as well as endure the increased ratio of demerit goods and decreased public goods. The biggest trading block is the Trans-Pacific Partnership, which arouses public concerns regarding plausible enhancement of environmental issues caused by its performance. Assessing the problem of free markets from a narrower focus, in particular, trading relations between the US and Australia, it is possible to state that it leads to financial losses including the overuse of resources.
