Weimer and Vining discuss market failures as one justification for government intervention in market relations. Define market failures and at least three distinct types of market failures. Provide three concrete, specific examples of market failures and discuss policy instruments that might be proposed to address each market failure. What are the potential problems or challenges associated with each instrument that might make its use difficult?
It has been long believed by many theorists that pure free market economy was the perfect model for economic development. However, nothing appears to be perfect – people, who according to free market economy advocates always find the optimal solutions, are in many cases acting irrationally, Increasing global effort might also be a hard task to tackle, as it is very unlikely that governments of different countries will agree to an effective scheme to deal with this negative externality (especially the governments of developing countries).
Labor market failure (unemployment) is another type of market failure. Unemployment is a scarcity created on the job market caused either by lack of jobs (supply) or by lack of trained workers suitable for the jobs available (demand). This market failure bears relatively high importance in developing countries, where unemployment rates hit high numbers. The Republic of Georgia is not an exception. Georgian government has made huge progress in terms of allowing international companies to easily invest in the country. Lower taxes, less paperwork, better infrastructure – are some of the many inputs that international investors are looking for. However, globalization in developing countries can lead to inequality. According to a World Bank report, workers in multinational companies in The Republic of Georgia are higher paid than the ones working in the local businesses. The trend is the same in many other developing countries. Therefore, globalization can increase the wages of skilled workers, while compressing those of the untrained and unskilled (inequality represents one of the
