Difficult decisions: to cooperate or defect?This week we have tried to raise your awareness of 'market failures' as a rationale for government action (public policy).
It has just been a little taste and to understand these ideas better you will need to do some reading and thinking. There will also be more chances to apply these ideas in the weeks ahead.
To trust or not to trust?You should also be aware that, even within economics, there is some debate about 'market failures'. For example, some folks in the 'transaction cost analysis' school of thought have attacked the whole notion. Others join Milton Friedman in disputing that market failure is sufficient justification for government action (saying that any attempt to do so introduces 'government failures' that are even worse than the market failures they are meant to cure) .
If you 'google' the term, market failure, you will also see that various sources list a slightly different set of such failures (although there are some items on the vast majority of the lists, such as public goods, externalities, monopoly power or market power, and information problems). This can be a bit confusing.
Nevertheless, the notion of market failure is the mainstream way of explaining why government needs to act in many situations. So you will need a working knowledge of the idea's basics.
Many of the policy instruments next week will be about correction one or more of these market failures.
How could they do that to us?
3 comments:
I came away from the class a little unsettled, but convinced about the equity versus efficiency debate. The 'market failure' concept came through clearly - but it looked as if there were two types of "winners" last week. [I term them winners, because Boyd listed out the 'dream results' - where top scores were listed]
The two winners - (i) those who collaborated and took risks together, and (ii) those who went back on their word, and destroyed the opposite team. Highly efficient teams.
Was the latter winning team creating public value? By destroying relations with the opposite team repeatedly, they scored high in the short run, but would this continue over the next few rounds? Who would pay for the costs of this short-term high-efficiency strategy?
And what about teams that continue to mistrust each other - and (reluctantly) kept the prices low? Wouldnt consumers in the third country stand to gain by lower prices?
There wasnt much time to discuss these questions, so I look forward to the rest of you sharing your thoughts on the exercise.
it might be helpful to understand the concept of absolute vis-a-vis relative gains in trying to understand the behavior of actors in a particular game.
absolute gains refer to those benefits that an actor obtains (or chooses to obtain) regardless of what other actors get. relative gains, on the other hand, are those that an actor obtains (or chooses to obtain) in relation to what another actor obtains.
some actors prefer or only consider their absolute gains because they see the game as non-zero-sum (i.e., one's gain is not necessarily another's loss). in contrast, other actors prefer or choose to behave on the basis of their relative gains because they see the game as zero-sum (one actor's gain is another actor's loss).
so who's better or creating (better) public value? i believe it's really a matter of values/ideals and individual preferences. but as they say, life as a game is not just about winning; it's also about how you play the game.
One example i can contribute to this is the scenario of private hospitals at the heart of Manila. For sometime, there were only about 3-5 main private tertiary level hospitals serving the metropolis. As the years went by, people had higher incomes thus more and more chose to seek care in private hospitals. Patient load was making the hospital business profitable. In the last three years, two major players entered the private hospital industry. Some people within the medical community commented that instead of putting up two more hospitals, the corporations should have considered collaborating instead with the existing ones. The new hospitals did not induce equal sharing of patients as expected. Majority of them do not fill up their bed capacities and the losses may have been passed on to their clients. In order to compete with the other hospitals, each insitution would invest on something to attract possible clients. This entails large amount of money that would again result to higher transaction cost for the patients. In retrospect, did the expected market mechanism work for these private hospitals? Did the plan to provide patients with more options become beneficial? There were discussions as well that the government should have controlled the number of hospitals and should in fact stop another corporation who would plan to put up another private hospital. Would people have benefited from a government intervention that would inform them of which way to proceed? However, it is never the practice of the government to stop any enterprise from venturing in the market...
...it is more like the groups outbidding each other...
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