Question

(1) identify problems and pitfalls with technology where government intervention can improve market outcomes,

Clearly outline the issue

Why hasn't the free market arrived at a solution (what is the market friction? lack of property rights? transactions costs?)

(2) propose a policy and analyze proposed policy using cost/benefit analysis, survey results, results from other countries (accounting for similarities and dissimilarities in culture and values),

(3) compile the results into a white paper prescribing a policy action aimed at alleviating the issues identified in (1)

Answer 1

Market Failure and need of government for correction – An imperfect market outcome can be corrected by proper allocation of resources and government policy (for ex. Disinvestment on public sector i.e. government stockholding). The most common thing of a market failure is failing to attain the standards of “a perfect competition in the general equilibrium of economics” it is easily recognizable. While the price equilibrium is a shifting target, consider all sellers and buyers in the market are very important for selling and buying activity.

A market failure has a negative effect on the economy due to the misallocation of resources. In other words, the social cost to manufacture the goods or services i.e. all the opportunity costs of input resources used in the creation, are not minimized. This also leads to the wastage of resources.

There are some Reasons for Market Failure

Market failures happen because of the inefficiency to correctly allocate the goods and services. The price mechanism fails to factor in all the costs and benefits involved while providing a particular goods or service. In such cases, the market can’t produce goods that are socially not optimal. They will be either underproduction or overproduction.

Externalities: There are two types of externalities, namely positive and negative. An externality is the effect on a third party which is usually caused by availing a particular good or service. Positive externality for instance, while public education may directly affect only the schools and their students, an educated population will extend positive effects on the society as a whole. A negative externality, on the other hand, for instance, passive smoking could adversely affect people’s health, even if they don’t directly indulge in smoking.

• Effects of Environment: Effects on environment as an important consideration along with sustainable development, it can create positive as well as negative externality on society, it can led to market failure due to asymmetric distribution of information.
• Underproduction of merit goods (public goods and these are non-rival in nature excludes no one): Merit goods are public sector products that the society believes is under-consumed for instance healthcare centers, educational institutions, sports centers etc. are considered as merit goods.

Here I am also giving the brief on CBA (Cost Benefit Analysis).

First of all, we have to we have to understand the difference between Cost Benefit Analysis and Cost Effectiveness Analysis.

                                Cost Benefit Analysis

                Here we will discuss about Cost Benefit Analysis or say CBA, this method is most popular and appropriate method of evaluating projects from the point of view from society. It helps the government or authorized bodies to continue with the project or to scrap the project, such as for ex. Flyover, bypass, metro, dam and so on. In this method it actually provides the power of decision making to the respected authority. It generally includes the processes of identification, comparison, measurement and evaluation for the cost and benefits to the society.

In this process it implies the benefits against the cost involved for the projects. If the benefits are more to the cost of the project it should be continued. And if the benefits are lower than the cost of the project the project should be discarded or scrapped.

               

                                                Cost Effectiveness Analysis

                Here we are discussing about the Cost Effectiveness Analysis or say CEA, Like Cost Benefit Analysis the Cost Effectiveness Analysis considers the output produced by the particular project, and these outputs are not measured in the monetary terms, these are measured in the effectiveness of the project. For ex. A flyover builds in the particular area and it starts operating and produces more pollution in that particular area and causes the more health effects on the society in that particular flyover area. The more serious problems are reported from the society like lung diseases, respiratory dysfunction, eye and throat irritation and so on. And in health economics the health care researchers are often uses cost effectiveness analysis to measure the cost of health care interventions for ex. Lives saved or diseases cured, health improvements and so on.

In between of these two analysis, the Cost Effectiveness Analysis is always preferred over the Cost Benefit Analysis. And it is very simple to calculate the effectiveness of the particular project.