This essay is an attempt to critically examine the statement that “irrespective of how we define the public sector or how we measure its size, it is important to realize that governments, like markets, can also fail”. Furthermore, this essay will try to outline the causes of government failure. In order to achieve this, an investigation into why there has been a shift of concern from market failure to government failure will be undertaken and relevant definitions will be cited. Finally, the possible causes of government failure will be outlined. A conclusion will then be drawn from the discourse.
To begin with, the public sector refers to the range of economic activities where resources are controlled and decisions over their use are taken by agencies responsible to the government through its political institutions. In other words, it is the economic sector controlled by the State and not directly subject to the normal market forces of private consumption and supply though these may influence decisions taken through the political machinery of the State. In Zambia, like in most countries, the public sector consists of the central government and the local authorities. Since the extensive privatization that began in 1991 and went on through the 90s, the nationalized industries are no longer a major part of the public sector. At the same time, there has developed a number of non-elected bodies appointed by the central government. The size of the public sector, therefore, is dependent on the number of institutions which are mandated by the State. These include government ministries, commissions and authorities, and parastatal organizations. Market forces on the other hand are underlying influences on the operation of the economy. They boil down to supply and demand---the basic factors determining price. According to the theory, or law, of supply and demand, the market prices of commodities and services are determined by the relationship of supply to demand. Theoretically, when supply exceeds demand, sellers must lower prices to stimulate sales; conversely, when demand exceeds supply, buyers bid prices up as they compete to buy goods. The terms supply and demand do not mean the amount of goods and services actually sold and bought; in any sale the amount sold is equal to the amount bought, and such supply and demand, therefore, are always equal. In economic theory, supply is the amount available for sale or the amount that sellers are willing to sell at a specified price, and demand, sometimes called effective demand, is the amount purchasers are willing to buy at a specified price (Samuelson and Nordhaus, 1998).
The theory of supply and demand takes into consideration the influence on prices of such factors as an increase or decrease in the cost of production, but regards that influence as an indirect one, because it affects prices only by causing a change in supply, demand, or both. Other factors indirectly affecting prices include changes in consumption habits (for example, a shift from natural silk to artificial silk fabrics) and the restrictive practices of monopolies, trusts, and cartels. In the view of many economists, the multiplicity of such indirect factors is so great that the terms supply and demand are inclusive categories of economic forces affecting prices, rather than precise, primary causal factors (open citation). Market forces vary from market to market and derive their power from the individuals who make up a market and on whose lives they have enormous influence. They are determined by such factors as wealth, consumer taste, regulation, and taxation. Stringent safety requirements may push up the cost, and therefore the price, of a potentially desirable product beyond that which a sufficient number of consumers can afford or are willing to pay.
The price-determining mechanism of supply and demand is operative only in economic systems in which competition is largely unrestricted. Increasing recourse, in recent times, to governmental regulation of the economy has tended to restrict the scope of the operation of the supply-and-demand mechanism---the market.
In a pure free market economy, market forces are unrestrained. However, in all countries, governments to a greater or lesser degree restrict the operation of the free market and therefore distort or even negate the effect of market forces through economic policy. For example, in the former Communist countries the system of central planning left no room for market forces to operate. In other parts of the world governments have often, for different reasons, sought to override market forces through such actions as the granting of subsidies to firms or services that (it is assumed) could not survive in a free market, or the imposition of tariffs or quotas on imports. This has led to market failures.
According to Antoff and Hahn (2009) a market failure can arise if there are externalities, such as pollution; or if there are inefficiencies associated with market structure, such as cartels, monopolies, and oligopolies.
A monopoly is the control of market supply: a situation in which one company controls an industry or is the only provider of a product or service while an oligopoly is an economic condition in which there are so few suppliers of a product that one supplier's actions can have a significant impact on prices and on its competitors. A cartel is an alliance of business companies formed to control production, competition, and prices (Microsoft Encarta Dictionary, 2009).
Basically speaking, markets fail when there is disequilibrium in supply and demand factors. Firstly, markets fail because of the unequal allocati...