<Name>
<Subject>
<Professor>
Part I
Market failure has several types, two of which being monopolization and imperfect information. Monopolization refers to the emergence of only one player in a given market. If a market involves only one supplier, then that supplier has the power to command higher prices on the products it supplies. In that case, there is no competition to compel the supplier to lower its prices on products. Without any competition, the people benefiting from the products supplied by the supplier will have no choice but to pay for the price the supplier sets. In that case, if the supplier sets a high price, then the people have no choice but to burden themselves with paying the high price whenever they need the product. In that sense, there is market failure because there is no competition that would level the playing field on the products involved. The sole supplier has the consequent power to dictate its prices even at astronomical levels, provided there is no other supplier in competition. Deterrents to market competition on one product are thus important in studying market failure. The nature of the product or the playing field itself may determine the kind of market competition deterrents that causes the occurrence of monopolization. Price increase on products sold by a supplier in a monopoly usually find basis not on economic factors, but on circumstances discretionary on the part of the supplier. Thus, economic efficiency and allocation become negatively affected, since a monopolistic system tends to disadvantage the people as consumers, given that they have to pay for a product priced based on the discretion of the lone supplier. The mismatch between the benefit of the product and the price set by the lone supplier in a monopoly is a strong manifestation of inefficient economic allocation. Therefore, a monopoly stands as a strong example of market failure (Williamson, 1972).
In the case of imperfect information, suppliers in a market incur the wrong kinds of information that lead them to make mistakes in their practices. When mistakes occur on the part of suppliers due to imperfect information, they will have the tendency to make the wrong kinds of investments on particular stages of product development. In that case, wrong investments could lead to failures on meeting objectives on a product, which could ultimately lead to circumstances such as capital loss and deficits, decline of sales figures and the like. Imperfect information within a market could also cause suppliers to create strategies that could become costlier than projected. For example, a troubleshooting scenario supplied with inadequate information may induce suppliers to make strategies outside of their allocated budgets. With that, market failure occurs, since suppliers have no leeway to stay within their budget allocations in the face of imperfect information. Another important consideration for imperfect information is on the data on target markets. When suppliers wrongfully stand by ill-founded data on their target markets, they have the tendency to create objectives that may not be in line – opposite at best, with the real preferences involved. In that case, the market involved could fail resulting from suppliers losing sales and investment capital over incongruent information. Lastly, the complexity of information could lead suppliers to provide outputs of substandard quality. When suppliers deal with information that is beyond the capabilities of their research and development capital, there is a great tendency that they would end up creating outputs beyond their field of expertise. With that happening, suppliers would end up creating substandard outputs that has the large possibility of not meeting the standards set by the complex information involved. Market failure due to imperfect information is therefore highly manifested in the outputs and actions of suppliers (Stiglitz, 1989).
Government policies play significant roles in minimizing the emergence of market failures. After all, market failures arise due to externalities that cause inefficient economic allocation. In the case of monopolization, factors inducing the existence of only one supplier serve as the externalities government policies should resolve. In that case, government policies could impose prohibitions on laws protective of the monopolistic nature of suppliers in monopolies. Congressional bodies should work on creating necessary policies when such are absent for implementation. Executive agencies must practice keenness in implementing existing laws that would render certain protections of suppliers illegal. Through that, the practice of monopolistic activities would decline. Another area in which government policies could improve markets against the formation of monopolies is the improvement of the playing fields involved. If, for example, a particular market incurs tendencies to form monopolies due to lack of efforts to improve the field it is involved in, particularly in terms of research and development, investment and manpower skills, among many others, then congressional bodies should make efforts to expand such kinds of fields through government policies. Generally, government policies could command changes leading to the dissolution of monopolies. Yet, for government policies to become effective, it is imperative to analyze particular circumstances that cause monopolies to emerge (Bator, 1958; Williamson, 1972).
For imperfect information, government policies could encourage more activities related to research and development in order to prevent suppliers to incur and use information that is inadequate and ill founded. Verily, suppliers have the responsibility to ensure the accuracy of the information they utilize. Yet, not all suppliers undergo such practice responsibly, considering that some hastily proceed to creating outputs they think would eventually translate to profit. To avoid such scenario, it is important for government policies not just to encourage suppliers to undergo research and development efforts responsibly, but also to mandate rules that would streamline related processes. When suppliers abide by such policies, they would encounter lesser chances of encountering imperfect information (Bator, 1958; Stiglitz, 1989).
However, the extent to which government interference would permeate on the process of reducing market failure has to meet considerations on limitations. When too little government interference is present, the tendency is that government policies would have little or no effect on reducing market failure. Monopolization would continue to thrive and imperfect information would still prevail if government policies in place for eliminating both types of market failure lack legal sharpness in terms of effectiveness. Government interference, in that sense, should come at a stronger presence that is good enough to curtail the problem of market failure. Yet, too much government interference might end up hampering the process of making way for effective economic allocation as well, and thus may become a source of market failure. In that case, the government may induce monopolies to become stronger and imperfect information to remain in place if it introduces too many constraints on suppliers in the form of government policies. In return, suppliers might end up bypassing those constraints on government policies. That would lead to the ineffectiveness of the government policies in place and would place the image of government interference as that of an ineffective one that paves way for too many constraints. To remedy such problem, it is always essential for the government to interfere in a balanced manner. Possessing proper knowledge on market failure situations at hand could enable better results in government interference (Bator, 1958).
Part II
Taxation serves as among the three inherited powers of the state, alongside eminent domain and police power. The state needs to collect taxes through a series of rules on taxation in order to fund its projects for the benefit of the citizens. Without taxation-related activities, the state would not have any other means of funding its programs. The absence of taxation would mean the absence of state activities as such require the use of funds coming from the citizens. In that case, taxation is a mandatory activity in every state, each with its own set of related policies. Taxation policies depend on the priorities of the implementing state, all based on national goals and policies set by the covenant between the state and the citizens. Thus, there is no denial to the premise that taxation is a necessary activity of every state (Bernanke and Mihov, 1998).
Yet, there is a view on taxation being a possible change agent on economic activities. Since policies on taxation requires citizens to contribute part of their income in various transactions, there are tendencies in which consumers, investors and others involved in the economic process might find taxes as disincentives to their activities. Depending on the rate of taxes, those subjected to taxation may end up preventing themselves to avoid paying taxes by avoiding economic involvement at all. What is deeply concerning is the fact that taxation in nations that have underdeveloped systems tend to involve taxes set discretionally and based on weak reasons, hence hampering the economic processes effectively. Thus, the findings set in the work of Christina and David Romer, as provided for this study, bear significant relevance to the issue of taxation in relation to economic activities. Verily, said study found that taxation, depending on the level and purpose, greatly constrains economic activities. Taxation policies should find reconsideration in view of the fact that economic activities might face reduction due to high or frequent collection of taxes. It is in that case where the necessity of constructing viable taxation policies arises. Taxation, in fact, could actually become a way to boost economic activities. One way of doing so is to construct taxation policies that would provide incentives to potential participants in economic activities. By making taxation an incentive-driven act and not a duty that has several constraints, participants in economic activities could grow in large numbers. Verily, it is important to impose motivation as a key factor in creating taxation policies. With due insurance from the government that it will perform its part by providing contributions raising the cause of positive growth in economic activities, participants in economic activities would find greater worth in paying taxes. In other words, it is important for participants in economic activities to have a rational purpose on why they have to pay taxes. After all, it is proper for taxpayers to expect something from the government in return for their mandatory contributions, given that such is an additional financial burden on their part. Without a proper purpose to justify taxation, participants in economic activities would end up doing their best to minimize payment of taxes, even though it is still inevitable for many of them to encounter certain forms of taxation, such as in the case of consumption taxes (Romer and Romer, 1994).
Another way in which the government could become more effective in taxation in light of its nature to introduce constraints is for it to identify certain revenue collection areas where economic activities would have greater effects. Since taxation introduces constraints on economic activities, it is a given fact that participants in economic activities would end up avoiding any act of taxation on their part. Areas such as investments, businesses and all other similar fields are those wherein taxation has vast effects on their growth. By going through several perusals of such cases, government policymakers could gain wider insights on resolving the problem of taxation in terms of its constraints-prone nature. There is, indeed, no doubt to the fact that taxation requires a strong give-and-take relationship between the government and the people who pay for taxes who stand as participants to economic activities. Yet, the fact remains that the government has the burden to provide convincing remarks based on the policies to taxpayers bearing the burden of surrendering parts of their revenue to government coffers. In that case, the government has to ease that burden by showing that they are providing positive benefits in return. Focusing on economic activities that could suffer the most from constraints introduced by taxation is a recommendable start for the government to start structuring its taxation reforms. Verily, the government could act as a stabilizer of economic activities without having to suffer major cuts in its revenue collection through acting as an analytical force that creates solutions at the same time (Bernanke and Mihov, 1998; Romer and Romer, 1994).
Finally, the government should give all that it could to promote its taxation programs to citizens. Being transparent on taxation programs ensures that taxpayers would have the information that they need concerning taxes. Verily, taxpayers do not prefer dealing with taxes placed clandestinely against their financial accounts. What taxpayers prefer is a clear indication of the need to pay certain taxes, alongside the benefits and reasons for such. In that case, the government should expose more of its charismatic side in being transparent on its taxation programs so that taxpayers could freely provide their contributions (Bernanke and Mihov, 1998).
References
Bator, F. (1958). The anatomy of market failure. The Quarterly Journal of Economics, 72 (3), 351-379.
Bernanke, B., and Mihov, I. (1998). Measuring monetary policy. The Quarterly Journal of Economics 113 (3), 869-902.
Romer, C., and Romer, D. (1994). Monetary policy matters. Journal of Monetary Economics 34 (3), 75-88.
Stiglitz, J. (1989). Markets, market failures and development. The American Economic Review, 79 (2), 197-203.
Williamson, O. (1972). Dominant firms and the monopoly problem: Market failure considerations. Harvard Law Review, 85 (8), 1512-1531.
