Question

2 Discuss an example of market failure and whether the government has been effective in implementing policies to correct it.

Answer 1

When products demanded by consumers do not equal the quantity of supply of products, market failure occur. When market fails to allocate resources efficiently, market failure is inevitable. An example of market failure could be explained from the liberalisation of trade or the negotiations of NAFTA (North American Free Trade Association) which caused greater loss to US economy. NAFTA was signed in 1993 which paved the way for free trade agreement among USA, Canada and Mexico. This free trade negotiation mostly eliminated the tariffs imposed on products traded among these three countries. Though the aim of NAFTA was to strengthening the economy by creating more jobs and raising income, but the i pact of free trade was worst in the US market. Free trade allowed imported products from Canada and Mexico to rein in the USA market due to their cheap prices which led many companies and manufacturing units to close down or shift abroad to cut down their costs. Thousands of people lost their jobs and became unemployed as many production companies shifted to Mexico or Canada. Wages rate of workers also went down in the country as NAFTA propelled employers to cut down their cost of input in the production function leading to the falling of workers' benefits and living standards falling behind their productivity. The purpose of NAFTA to make North America more competitive in the global market is dwindling with the increasing trade deficit in USA.

The negative impact of NAFTA on USA economy has garnered lots of interests to repeal or update the negotiation for a long time and finally USMCA (United States- Mexico- Canada Agreement) was signed between the three countries in 2018 to renegotiate the deals of NAFTA. As NAFTA is considered as the worst trade agreement by the current president of USA, he threatened to pull off the country from the agreement had it not renegotiated. The renewed agreement covers a wide range of topics in order to eliminate the effects of trade deficits and economic losses. The new guidelines include providing greater access of the Canadian market to US dairy farmers, Manufacturing higher proportion of automobiles amongst the three countries rather than importing from elsewhere, improving labour condition and wages, providing intellectual and digital trade and sunset clause which defines the terms of expiry of agreement after a set of period of time. So this new deal has been implemented in order to correct the economic turmoil brought by the NAFTA in USA