Why Do We Need Policy?

Topics: Economics, Policy, Developing country Pages: 37 (9753 words) Published: December 11, 2010



Why do we need policy?

Main reasons for market failure.
1. Lock of information.
2. ‘Pure public goods.’ which cannot be allocated efficiently by private markets. 3. Imperfect competition.

Lack of information.

When marketers lack information or have inadequate information, the results of the market will reflect ignorance, luck or accident rather than informed behavior. Typically consumers guide themselves by advertising and casual information e.g. by advertising. Thus a certain amount of ignorance always remains in all markets, causing prices and quantities to differ from what they would be if we had complete information.

Pure public goods.

Examples: education, public health, defense, weather service, lighthouses, law and order public institutions.


1. Consumption of a public good by any one individual does not interfere with its consumption by another.

2. No one can exclude from the use of a public good.

3. No way that we can, by ourselves buy defense, laws and order services or a weather service.

Accordingly then is no way to set up a market.


• Smoke from local factories.
• Sludge pouring from a mill into a lake.
• Wastes, dirt, noise, and congestion.
• Speed limits.

Externalities bring into focus a very series problem in our economic system: controlling pollution which in the production of wastes dirt, noise and congestion. Main ways of controlling pollution:

1. Enforce laws and regulations to reduce pollution.

2. Tax firms which produce waste and dirt (after called effusent charges).

3. Subsidize polluters to stop polluting (e.g. pay households to return old cans and bottles to factories).

Lengthening time horizons.

• Investment in education, infrastructure, research and development(R&D) health care for the elderly and the poor. e.g. biotechnology and telecommunication internet firms. • The American federal national institute of health started R&D on biotech (called biophysics) in the early1960. • The internet started (25) years ago as a nuclear-bomb-proof communication system, thereafter as a national science foundation projects. accordingly investment in education health care R&D infrastructure have at least partly financed by governments.

Imperfect competition.

- In a purely competitive market the consumer is king and the rationale for such a market is described as consumer sovereignty, which means:

1. In a pure competitive market the consumer determines the allocation of resources by his or her demand. 2. The consumer enjoys goods that are produced as abundantly and sold as cheaply as possible.

In a monopolistic or oligopotistic markets the consumer loses much of this sovereignty. Although monopolies and oligo is may charge higher than necessary prices in the short- run, this may not really be failures in the sense that they may potentially yidd off setting benefits if the resulting large profits are organizational innovation. However monopolies and oligopolies may not undertake such innovative activity because of lack of competitive pressure, in which case their conduct indeed leads to marked failure, which may require policy interventions.


Culture, social norms and economics: some impactions for policy MARK CASSON 1997.

The author argues that:

- Many economic theories are based on the assumption that economic agents are only with maximizing their personal and material well being.

- They are supposed to be exclusively materialistic and selfish.

But the neo- classical school of economic theory (the dominant discipline of economics) argues that: The working of competitive markets ensures that when such selfish and money-minded, individuals try to maximize their rewards the competitive process generally...
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