“The governments of many developing countries are sometimes part of the problem of coordination failures.” Explain and discuss. Word count: 997
In this essay I will explain what is meant by coordination failures and how these might arise and subsequently persist. It will then be shown how governments can attempt to overcome these using policies however this is not always successful as governments sometimes cause the problem to persist. A coordination failure is when economic agents do not properly coordinate their choice which then leads to an equilibrium outcome that leaves agents worse off. The alternative situation would be a more optimal equilibrium outcome however since agents do not coordinate their behaviour, they settle at the suboptimal equilibrium. It may be the case that agents are aware of the preferred equilibrium but there are difficulties reaching this because of coordination. Adam Smith said “The division of labour is limited by the extent of the market, the extent of the market is also limited by the division of labour”, markets are highly interdependent therefore highlighting the way coordination failures can keep developing economies in the poverty trap. An example would be with primary and secondary education in poor countries. If parents expect their neighbours to choose primary education rather than secondary, they will also choose primary education for...