RELATIONSHIP BETWEEN THE STATE, MARKET AND CITIZENS
The study represents a framework for comparing government regulated allocations and market allocations. The government has the capacity of collecting individual information from citizens, which enable the governing body to enforce transfer across individual citizens. Furthermore, the government can achieve appropriate consumption smoothing and risk sharing when compared to markets. Contrary, politicians who take an integrative approach of making collective decisions can access the centralized information and through enforcement of government power; they can use resources for their benefits (Alesina & Passalacqua, 2016). In such instances, the political economy becomes distorted, and politician rents make the allocation mechanism of government worse than markets.
As such, sometimes, effective control on politicians can make the government more effective than markets. Effective control of politicians can make the government more effective than markets (Warner, 2018). However, if markets cannot engage self-enforcement and risk- sharing, income is affected because of considerable uncertainty and risk aversion making the government more attractive than markets. Notably, if markets support self-enforcement and risk- sharing, there is a high level of degree in risk aversion which can improve the level of risk sharing in markets and thus, the government becomes less effective. As such, income effects in the supply of labor may induce the same pattern. Government welfare gains relative to markets make cause an inverse U- shape which acts as a function of the degree of individual risk aversion.
There exist an underlying question on economic concerns and the relative roles of governments and markets when it comes to the effective allocation of resources. In classical commercial approach and looking at celebrated first welfare theorem and Adam Smith invisible hand, some conditions of market structure, unfettered completion and information can achieve Pareto optimal effects in allocating resources. In such situations, insurance against specific risks is adequately provided by the feasible allocation of resources and markets can be achieved with the active redistribution of endowments. Besides, economists have realized such conception of the usual way of markets might be too optimistic, which calls upon the intervention of the government. Furthermore, economists that are influenced by ideas of socialists once argued that the mechanism used by state governments to allocated resources in the process of collection individual information while respecting individual incentives might term superior with the existence of unfettered completion in a market economy. According to Lange concept, there was no valid reason for the government to allocate resources, although the concept was criticized. However, many economists who include Von Hayek and Lerner criticized the plausibility and feasibility of central allocation of resources (Wubben, 2016). For instance, Hayek came with a central plan critique which concluded that informational requirements of central operation approaches appeared to be prohibitive and thus markets should be allowed to provide the best economic means in aggregating enhancing information.
Origins if design approach mechanism to economics faces constant criticism. An underlying question which attempted to motivate the analysis of Hurwitz’s was meant to give the best approach of understanding the favorable conditions where market induces the best possible approach of allocating resources. Many economists further developed the mechanism design theory by showcasing a wide range of applications as well as powerful intuitions. Consequently, the original objective of the literature of mechanism design, which was earlier brought forth by Hurwicz, have never been fulfilled. However, the modern approach of mechanism design implies that allocation can be achieved by the existence of a decentralized market system because centralized mechanisms can replicate it. As such, when the economic environment does not consider the application of first welfare theorem, tools become better than actual markets. With this view in mind, the mechanism used by the government in operated centralized may lead to improved resource allocation, which conforms to relative markets.
In most modern economies, resources are allocated by markets rather than the government. Give the government tendency to intervene the economy; one can argue that with the existence of clearer objectives of mechanism the government use to operate the free market economy, there would be a widespread of market-based allocations. Besides, the new mechanism of design des does not showcase the difficulties existing in the centralized device of operations. According to Hayek, the cost of communication used in reporting preferences in centralized decision makers constitutes of major centralization cost, which is held into account (May 2018). Furthermore, mechanisms are usually assumed to be operated by planners with benevolent objectives, albeit they are believed to also possess full commitment power to the allocation of future rules.
Markets refer to the situation where the centralized design mechanism, especially in risk sharing arrangements. Besides, different market conceptions are possible, and by comparing the markets and governments can clearly show how markets can function effectively. Furthermore, comparison of the two can show how markets provide collective goods, allocate risks across individual citizens and enforce various contracts over a considerable amount of time. There are two basic canonical models of markets.
Fully anonymous markets
The model allows effective trade among individuals, although some of these transactions are somehow anonymous. The anonymity rules are out of various types of insurance which leave self- insurance as the only alternative to individuals. As such, the unknown market model tends to become analogous to Bewley- Aiyagari economy which assert incomplete markets and as such, individual can only insure against idiosyncratic risk when an individual is a self- insured.
Self- enforcing markets
In this model, individuals can form self- enforcing coalition. Besides, the government do not control the model, any individual who deviates from a particular risk-sharing arrangement can only be punished if excluded from the coalition of future risk- sharing. The conception model of market assimilates other economies of developmental thinkers.
Fully anonymous markets
Refers to a market structure where no past information of transactions among individuals is available. It implies that any kind of insurance that is considered to be a form of risk sharing among individuals is not possible. With the availability of capital, anonymous markets can appreciate self- insurance, which also applies in Bewley- Aiyagari models. Because there is no capital in the economy, fully anonymous markets can assert autarchy, particularly the period in which individuals consume his output. When combined with intertemporal separability of utility possessed by an individual, implies a form of equilibrium in fully anonymous markets which by following a problem of concave maximization on each. Nevertheless, the outcome is a proposition that shows that in fully anonymous markets, there can exist a unique equilibrium among individuals.
Sustainable mechanisms
If resources are allocated via a centralized mechanism, a politician is empowered to overview the resources. As such, a politician should be in a position of being entrusted to carry out the allocation of resources, which becomes a natural consequence in any centralized authority. The presence of self- interested politicians will imply that society needs to induce incentives to the politician in power to ensure that empowered politicians do not take actions that diminish the capacity of the society. Overall, the model represents a version of a model of electoral accountability. As such, developmental thinkers assume that there is a considerable amount of identical politician whose utility at a given time denoted consumption of politicians. Besides, it also turns out that the politician discount factor is potentially different from the individual citizen. As such, we can assume that aspirant politicians are distinct from citizens and as such, they never engage in production.
Equilibrium
Equilibrium regularly arises in a political economy setup, which is defined as the perfect equilibrium game between politicians and individuals that yield the highest level of utility among individuals. If there happens to problems associated with coordination leading to other forms of equilibria, the government become less attractive in the market systems. As such, a specific theory which can facilitate coordination problems should be used to focus on the best equilibria. If market allocations induce the best sustainable mechanism, they become a fortiori which assert other forms of regulations imposed by the government.
Best stationary mechanism
It corresponds with the best by equilibrium, which restricted to the stationary that gives the highest ex-ante payoff among individuals. Attention restriction stationary mechanism cannot be facilitated without generality loss because the ability of the society to induce intertemporal incentives to politicians is limited by stationary limits which may introduce additional distortions when compared to the sustainable mechanism. Qualitative results are sometimes affected with restriction and removal of stationary strategies. The construction of equilibria also corresponds to the provision of incentives to governments and individuals and can be separated by facilitating a problem of auxiliary maximization (Wang et al., 2018). As such, the best sustainable mechanism to this game is setoff incentives compatibility and constraints on individuals and the sustainability constraints of a politician.
Comparison of government and markets
Government intervene in the market system to address inefficient. With the existence of an optimal, efficient market, resources are allocated to individuals who want them in actual amounts they want. On the other hand, the inefficient market does not use the same approach because some individuals may have many resources, while others are disadvantaged. Inefficiency markets incorporate the use of different forms. For instance, the government may try to combat the inequities through taxation, regulation or subsidies. Besides, most government systems may have different objectives when intervening the market.
Social welfare maximization
In any unregulated and inefficient market, some cartel and some organization can have monopoly power a condition that can raise entry costs, thus limiting the process of developing infrastructure (Holtz-Eakin & Lovely, 2017). Without effective regulation by the governing authority, some businesses setup can produce negative externalities which cause some resources to diminish, instances of minimized trade as well as corresponding benefits. As such, regulation intervention by the government can actively address the issue. In another example, an intervention can promote social welfare, which involves public goods. There exist some depletable products which include public parks and cannot be left on the hand of individuals. Besides, the condition means that no price can be assigned to the use of that good and as such, every individual can effectively use the resource. As such, some of these resources can easily become depleted and thus the need of government to intervene in appropriate measures to ensure the sustainability of such resources because it is the only viable path to development agenda.
Macro-economic factors
The government may also intervene to minimize the damages associated with the economic events that occur naturally. Inflation and recessions are categorized as part of the natural business cycle of business, although the condition can be devastating to some citizens. As such, the government intervenes through manipulation and subsidies of supply of money to minimize the harsh impacts of the economic forces.
Social, economic factors
The government may also intervene in the market to promote the fairness of the general economy (Pigou, 2017). The government tries to tax and induce welfare intervention for social, economic reasons, which include the employment laws that are meant to protect some segments of population and regulation the process of manufacturing some products. Furthermore, the government can sometimes intervene in the markets to promote other goals, which included national unity and other advancement programs. Most people support the fact that the growth of large and impressive military does not only increase the security of the country but may also encourage pride. It is thus essential to promote national pride and unity, although it is valuable to government officials.
Price Ceilings
Refers to the act of controlling price and this limit how high a price can be charged in a particular commodity or service or product (Coyne et al., 2015). A price ceiling refers to the limit of the maximum price that is charged for a particular service or good. As such, ceilings are induced by the governing bodies, although some groups which manage exchanges can set limits. The reason for the price ceiling is to ensure the protection of all consumers while consuming certain products and services. The act of establishing a minimum price ensures that the government provides affordability of some commodities to ensure maximum satisfaction by consumers. An excellent example of a price ceiling is rent control. The regulations require a gradual increase in rent prices to the level that may demand by the government. The management is incorporated to protect the current tenants. Lack of rent control can induce some situation where the demand for housing in a locality may cause a substantial effect of the increase in rent prices. As such, individual may afford the new cost, and majority tenants may be forced to free out in some localities. As such, rent controls are induced by the government to protect the tenants from being disadvantaged by the sudden fluctuation of rent prices.
Notably, price ceilings may disrupt the market, and as such, it is essential to set a maximum price to ensure equilibrium price. Furthermore guaranteeing price equilibrium leads to excess demand because the price cannot increase to the extent of clearing excess. An effective price ceiling only exists if it is less than the cost of free-market equilibrium which refers to the price-induced into the board by the number of goods and services availed to consumers is equal to the number of products and services availed by suppliers. If the price ceiling is higher than what is charged by the market, then the regulation should bit be considered to be effective. As such, the government should research to assert the conditions of the current market conditions of goods before the process of setting the price ceiling.
The impact of the price ceiling on the overall outcomes of the market
A binding price has the capacity of creating surplus supply, which can decrease the amount of economic surplus (Cachon, Daniels & Lobel, 2017). Besides, the price ceiling impacts the market if the ceiling is below the equilibrium price of the free- market. If the price ceiling is set above the equilibrium price, it makes the product to be sold at the equilibrium price. On the other hand, if the price ceiling is less than economical price, it will have an immediate effect of shortage supply, meaning that less amount of goods will be produced. The quantity demanded will increase because more individuals are comfortable to pay a lower price to accommodate the goods and as such, suppliers supply fewer commodities cause a shift in demand because of a shortage of products and services.
Rationing
When the price ceiling is imposed for a considerable amount of time, the government may need to ration various goods to attract more consumers (Wilson, 2016). The government may distribute assets to issue a ticket to different consumers. Furthermore, the government only allows much good to be in the marketplace by considering the availability of tickets. As such, to obtain good, consumers must present a ticket to the vendor when purchasing the product. As such, this is considered as an effective way of minimizing the impact of shortages that are caused by the ceiling effect, although it is regarded as a viable approach or reserving some products during harsh economic times.
Price floors
A price floor is used to control how low a good or service is charged. It is set to protect producers of a particular commodity. The government establishes the minimum price aiming to encourage the production of a product and ensure that the business people have all the necessary resources. An active price floor has to be higher than the price established through competition whereby the number of commodities to be bought is equal to the good the sellers produce. (Horton, 2017). A lower floor price than the market charge is of no use.
On the other hand, if the floor price is high, there would occur a surplus of goods than the demand. Therefore, to set a good floor price, the government has to undertake thorough market research. For instance, the federal minimum wage is set in such a way that there is a wage that all employers must pay their workers and not less than the stated amount. This ensures that the workers are paid enough money to sustain their basic amenities.
Effect of a price floor on market outcome.
A price floor leads to an inefficient market and decreased total economic surplus. An active price floor ensures a high price of a commodity and therefore, the consumer surplus decreases. However, the profit margin will also reduce since there are fewer sales due to lower demand for products caused by the high prices. ( Hatfield, Plott & Tanaka, 2016). This results in a decrease in the economic surplus. To deal with the issue of excess supply, the government can buy the excess supply and store it. Later in times of food shortage, the government can sell the surplus though at a loss. Another option would be to accumulate the inventories and let the private producers bear the cost.
Deadweight loss
Deadweight loss occurs when a commodity is not priced at its Pareto optimal level. When the output is at the Pareto optimal point, price, production and consumption alteration of a product benefits one individual and negatively impacts the other one. In a competitive market, commodities are priced at the Pareto optimal point. Deadweight loss affects the consumer economic surplus or the producers’ economic surplus. Price controls, subsidies by the government might increase consumer or producer surplus, but either way, according to the economic theory, the losses sustained would be greater than any gains.
Advantage and disadvantages of price control
A considerable price control ensures that a basic amenity like food is affordable in a country. Also, regulation protects producers and ensures they get enough revenue. In case of shortages, price regulation can prevent producers from exploiting their customers. Price floors have a disadvantage as they often lead to surpluses; for instance, the price floor in the minimum wage to be paid per hour. This results in employers hiring fewer workers than they would if they could pay them less than the minimum wage. This results in a greater supply of workers than available jobs, which leads to unemployment.
Taxes
Most governments use taxes collected to fund development programs and pay off debts. It is also a measure to influence the citizen’s financial behavior. (Scholes, 2015). A sound tax system has to be efficient, understandable, and equitable and have a benefit principle whereby the people using public services should pay for them with higher taxes.
Conclusion
Government regulation affects standard financial services in many ways. Increased regulations mean higher workload for individuals citizens because it takes more time to adapt to new business practices which require one to follow the new rule. Control of the securities market is meant to protect investors from potential fraud and mismanagement of funds by politicians. However, management causes a ripple effect thus causing instability of financial consumers. Business tries to shift the increased cost to consumers and customers a condition that contradicts the government regulations.
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