University of Arkansas System
Type of paper: Thesis/Dissertation Chapter
Market Failure Research Paper
The following are some ideas to help you pick a topic for the Market Failure Research Paper assignment. Consult with your instructor if you are having trouble picking a topic. What are some areas where the MARKET fails to give us adequate quantity of output and desirable price?? (A) Public Goods and Service — Schools, Highways and Streets, Fire and Police Protection, National Defense, Prisons (B) Industries that Need to be Regulated — Utilities, Airlines, Banks — As our economy changes what other industries also need to be regulated or de-regulated? (C) Externalities — Companies produce some type of external cost that affects the community.
The company would not voluntarily reduce or eliminate this cost unless the government required them to do so. (These could also be benefits that would add to community but not benefit the company in any way.) (D) Income Inequality — Minimum Wage, Welfare Programs, Unemployment Benefits, Social Security, Medicaid — Areas where our society is becoming more socialized. Assignment: Pick one market in which the price system does not produce an equitable price and quantity of output. Write a paper of 250 words minimum discussion with at least (2) sources cited in the MLA format. Include in your discussion:
(1) What action has our government taken in order to provide this good or service in an equitable fashion?
(2) What are the alternatives to government intervention?
(3) What has been the end result of government intervention?
The rise in direct tax has the effect of reducing the post-tax income of those in work because for each hour of work taken the total net income is now lower. This might encourage the individual to work more hours to maintain his/her target income. Conversely, the effect might be to encourage less work since the higher tax might act as a disincentive to work. Of course many workers have little flexibility in the hours that they work. They will be contracted to work a certain number of hours, and changes in direct tax rates will not alter that.
The government has introduced a lower starting rate of income tax for lower income earners. This is designed to provide an incentive for people to work extra hours and keep more of what they earn.
Changes to the tax and benefit system also seek to reduce the risk of the ‘poverty trap’ – where households on low incomes see little net financial benefit from supplying extra hours of their labor. If tax and benefit reforms can improve incentives and lead to an increase in the labor supply, this will help to reduce the equilibrium rate of unemployment (the NAIRU) and thereby increase the economy’s non-inflationary growth rate.
Changes to indirect taxes in particular can have an effect on the pattern of demand for goods and services. For example, the rising value of duty on cigarettes and alcohol is designed to cause a substitution effect among consumers and thereby reduce the demand for what are perceived as “de-merit goods”. In contrast, a government financial subsidy to producers has the effect of reducing their costs of production, lowering the market price and encouraging an expansion of demand.
The use of indirect taxation and subsidies is often justified on the grounds of instances of market failure. But there might also be a justification based on achieving a more equitable allocation of resources – e.g. providing basic state health care free at the point of use.
Lower rates of corporation tax and other business taxes can stimulate an increase in business fixed capital investment spending. If planned investment increases, the nation’s capital stock can rise and the capital stock per worker employed can rise.
The government might also use tax allowances to stimulate increases in research and development and encourage more business start-ups. A favorable tax regime could also be attractive to inflows of foreign direct investment – a stimulus to the economy that might benefit both aggregate demand and supply. The Irish economy is often touted as an example of how substantial cuts in the rate of corporation tax can act as a magnet for large amounts of inward investment. The very low rates of company tax have been influential although it is not the only factor that has underpinned the sensational rates of economic growth enjoyed by the Irish economy over the last fifteen years.
Capital investment should not be seen solely in terms of the purchase of new machines. Changes to the tax system and specific areas of government spending might also be used to stimulate investment in technology, innovation, the skills of the labor force and social infrastructure. A good example of this might be a substantial increase in real spending on the transport infrastructure. Improvements in our transport system would add directly to aggregate demand, but would also provide a boost to productivity and competitiveness. Similarly increases in capital spending in education would have feedback effects in the long term on the supply-side of the economy.