Economics

Most economic policies have their foundation in the idea of a perfect market characterized by fully informed players, no transaction costs, and no externalities. Any deviations from the perfect model specifications lead to market failures. While scholars do theorize a perfect market, it is impossible to have a perfect market in practice (Booth, 2008). A market failure occurs when economic resources are allocated in a manner which leads to an outcome which is below the Pareto optimal (Makin, 2009). A market failure can occur if, among other situations, some players in the market possess information which others do not have, or there are too few players in the market, thereby encouraging collusion and price manipulation. For instance, when a few people have access to insider information and they use it unfairly to the disadvantage of the others, the market becomes biased against the majority. Government intervention in market operations also leads to market failure, mostly by forcing some people to pay for goods and services which others benefits from but do not pay for, for example taxes, subsidies, information disclosure requirements and performance standards. When the government gives subsidies to some farmers and not the others, the action tilts the market in favour of some, sometimes hurting others. All these factors affect market performance by making it less productive than a freely and fully competitive one. The market failure approach to analyzing policy evaluates and proposes solutions to bring an imperfect market to perfection, or to eliminate market failures. Depending on the cause and nature of the market failure, different policy solutions are advanced to correct the failure. Most instruments explored or proposed to correct market failure focus on allocation of resources and the efficiency of production processes. At the heart of most economic instruments is the emphasis on economic efficiency.  A successful market allocates economic resources in a manner that ensures that the resources produce the greatest good, without making others worse off (Makin, 2009).

Instruments which over-rely on measuring economic efficiency tend to ignore many other factors, which render them insufficient in assessing economic performance vis--vis the benefits society draws from the performance. Apart from the costs which are planned for in most economic projects, another cost is paid in the environmental impact of these projects yet the environmental cost is easily overlooked by developers and the experts using the economic instruments. Gold mining can yield great profits for the economy yet when this revenue is calculated, rarely is the environmental and human costs resulting from the ecologically-disastrous mining operations. Many measures of economic performance assume that all people in an economy get equal or equitable shares of the gains of the gross domestic product. However, this is untrue in most cases and has not been achieved even in the communist nations where economies were centrally-run. A small but influential (and politically-connected) minority gets the larger percentage of the wealth. An efficient instrument aimed at correcting market failure, or eliminating some of the weaknesses of imperfect markets, must take these additional factors into account.

No one policy instrument has proved sufficient and capable of singly correcting market failure (Goulder  Parry, 2008). Rather than propose one policy to correct all market shortcomings, policy-makers are confronted with the challenge of exploring a range of instruments to determine under which conditions an instrument or a combination of instruments is most appropriate (Bennear  Stavins, 2006). This is because different instruments are most appropriate in particular conditions and not others. For instance, mining and manufacturing industries tend to have large impacts on the people and the environment, compared to activities such as retailing. Policies to guide the former should therefore devote more attention to social and environmental costs of the activities.

Apart from economic factors, it is important that policy makers include environmental and social factors as criteria when designing policy. Practices which bring economic benefits to one country or class while harming the environment and other people must be judged as faulty yet instruments which are over-dependent on economic efficiency may find no problem with such practices particularly when the environmental and social cost (cost of the externality) is paid by others. For instance, the cost over-fishing in the high seas by one country may not necessarily be paid by the particular country. Policy makers further need to consider not just the distribution of resources but also the distribution of benefits from the exploitation of the resources. It does not follow that having access to resources leads to benefitting from the same. This happens when markets are controlled a few powerful people who ensure that the majority has only restricted access to the markets, and the benefits.