Why markets generally fail to achieve social efficiency Essay

Why markets generally fail to achieve social efficiency - Essay Example On the other hand, if the marginal cost to society exceeds the marginal benefit, then the social efficiency is low in that case. Whereas, when MSC and MSB are equal, it is referred to be at an optimum level (Suneja, pp.147, 2000). It is very difficult to achieve social efficiency and real markets fail to accomplish it because their marginal social costs do not equal the marginal social benefits. There are a number of reasons behind market failure. Externalities: â€Å"A market is not likely to lead to market efficiency if the deeds of the producers or consumers affect people other than themselves† (Sloman & Sutcliffe, pp.430, 2004). Externalities occur when society fails to make adequate compensation for the production of goods and services as well as for the consumption of these products. This is attributable to the ‘spillover effect’ this leads. Since the pricing system does not account for the marginal social costs and benefits that are attached to the compensa tion of these products, externalities exist, which may often lead to market failure. Social cost is the addition of private cost and the externalities. Let us take an example of a chemical industry. If a chemical industry release by products into a river or atmosphere, it is creating negative externalities that

Is it free market or regulated financial systems that underpin Essay

Is it free market or regulated financial systems that underpin long-term economic success and effective corporate governance - Essay Example he financial system through restrictions, laws, requirements and guidelines aimed at influencing the economic outcome, protecting the consumers or environment as well as maintaining the integrity or stability of the financial system. The major problem is that any occurrence of financial crises has been perceived as a failure of the governments or other relevant institutions to apply the necessary regulatory control measures to avert such financial crises (Bernanke, 2000, p.21). On the other hand, the increased government involvement in matters of both market and financial systems regulation has been perceived as highhandedness on the part of the government, and thus criticized on the basis of stifling the free operation of the markets. Thus, either way, the law of unintended consequences always applies. The issue of the operation of the economy and the markets is a tricky one, due to the fact that a complete lack of control of the economic operations by the government makes economic crises more likely and severe in the future (Doepke and Schneider, 2010, p.72). Generally, government or formal regulation that is too heavy may stifle future financial efficiency, while at the same time hindering innovation (Meltzer, 2004, p.163). However, although free market is necessary for economic growth, many critics argue that it may not be sufficient condition for economic success and effective corporate governance. This paper seeks to critically compare the free market and the regulated market systems with a view to evaluating whether it is free market or regulated financial systems that underpin long-term economic success and effective corporate governance using the five major economies namely the USA, UK, Japan, Germany and China as case studies. There are a number of theories that have sought to explain the potential impacts of different financial systems on the overall long term economic success of a country and effective corporate governance. For example, the Theory of