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Bogusław Czarny
The state and contemporary business activity
The occurence of market failure forces governments, apart from their macroeconomic policy, to intervene at the micro level. When the objectives of such intervention are being debated, liberals tend to emphasize efficiency, while socialists highlight equity. Efficiency-oriented approach translates into efforts to maximize the total surplus (e.g. the sum of consumer´s and producer´s surpluses). Equity in turn is often identified with equality.
The policy of protecting competition involves merger monitoring, splitting oversize corporations into smaller units, prevention of phenomena such as: price collusions and predatory pricing, exploitation by companies of their dominant market position or attempts to impair competition. A special case involves antimonopoly policy with respect to natural monopolies.
Externalities emerge when an agent on the economic scene influences other agents´ costs or utilities through means other than prices. By imposing bans, orders, taxes or resorting to other methods, the government induces businesses into creating an optimal amount of externalities.
Public goods are not subject to competition and cannot be restricted. The resulting free rider effect prevents companies from producing a sufficient amount of public goods. Under the circumstances, the state either undertakes to produce those goods, commissions their production or converts public goods into private ones. The dilemmas involved are similar to the problems arising from a situation termed as the tragedy of the commons.
Assymetry of information causes deadweight loss (e.g. hazardous goods and hazardous technologies). People often wrongly assess the utitility of socially desirable or undesirable goods. The state tries to prevent such mistakes by prohibiting or forcing certain behaviours, or through taxes or subsidies designed to encourage the public to buy certain goods and refrain from others.
In its pursuit of equity, the government smooths out market-generated income differences through taxes and transfers. Taxes are those mandatory levies imposed by the state upon households which do not result from ownership. The distribution of the tax burden and the ensuing deadweight loss depend on price elasticity of demand and supply. Whether taxes are fair or not depends on their progression rate and distribution. Transfer payments in turn are nonmarket flows of goods between consumers, producers and the government. Transfer payments may sometimes act as a disincentive to work. In the case of the "welfare notch", the motivation to work ceases to exist altogether.
Market-generated division of income amongst households, adjusted for state intervention, is represented by the Lorenz curve and Gini coefficient. Poverty line and poverty index both help establish the extent of poverty within a society.
It is not only the market that sometimes fails; the state has its flaws, too. For example, democratic majority decision-making does not guarantee accurate translation of voters´ preferences into relevant policies. The society is faced with the principal and agent problem. Some of the possible causes include the voting paradox, the median voter result, tacit collusion or concentrated benefits and diffused costs.
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