Small enterprises are the backbone of the European Economy (Chapter for Small Enterprises, European Council, 2000). They represent in excess of 90% of the worlds gross domestic produce. There are 5 million Seems in the European union (Peg. 31,A Guide The Understanding and The Interpretation of Financial Statements, DRP. Clive Welded-Biddy, 2008) Market failure Is when the competitive outcome of markets Is not efficient from the point of view of the economy as a whole. Market failure may occur when freely functioning markets operating without government intervention fail to deliver an efficient or optimal allocation of resources.
A decrease in technical efficiency would also lead to market failure whereby the production of goods and services are not using the minimum amount of resources possible, e. G. Burning up finite resources such as oil. Market failure can be caused by both macroeconomic and microeconomic variables. Inflation, interest rates, and economic recession are all macro causes for market failure. These can be said to be more widely influenced by the government. However on the other hand, the Bank of England sets Interest rates, of which Is now Independent from the government.
Microeconomic factors for market failure comply with the Idea of supply and demand In a specific Industry sector. This may be a ‘knock on’ effect of economic recession, such as a decrease in the average household disposable income. Thus meaning that there is a decrease in the demand for luxury or unnecessary goods such as cars. Car sales have greatly decreased globally following the increase in oil prices. The most obvious form of market failure is bankruptcy. In 1986, the UK introduced an Insolvency act, which acted in the favor of most of the starting up enterprises and encouraged more entrepreneurs.
Chapter 11 was used as a means of recovering remedies for firms close to bankruptcy. Monopoly is the first type of market failure, whereby a firm can produce a given set of goods or services at a much lower cost than all of Its competitors. A natural monopoly results when costs are decreasing In a scale of the firm, which Is also called an economy of scale. If It Is easy to break into a new market then, the threat of potential competition may be at a disadvantage, as they have no control to the price they are forced to set. Market dominance and abuse of monopoly rower would lead to Inclemency In ten market Owe to Imperfect competition.
Markets can also fail when the individual or a firm does not have sufficient information to recognize the returns from undertaking an action. Imperfect knowledge can take place by consumers not having adequate technical knowledge, like using the Internet to look at different competitors prices. Advertising can mislead people into interpreting a different message. Producers may also not be aware of all the opportunities, or cannot accurately measure productivity. Decisions are commonly based on past experience rather than future knowledge. The failure of the arrest to insure against uncertainties has created many social institutions in which the usual assumptions of the market are to some extent contradicted. ‘ (Kenneth Arrow, 1963) Externalities may also cause market failure, however they may also be beneficial. These can be categorized by external or social costs (negative externalities), or external benefits (positive externalities). A negative externalities is when the 3rd party is put to a disadvantage. The 1st party is the supplier, the 2nd party is the consumer, and the 3rd party is anyone else.
A positive externalities is when the 3rd party is put to an advantage. Externalities create a divergence between private and social costs, and benefits. Most of the time, consumers and suppliers may fail to take externalities into account when making consumption and production decisions. Merit, De-merit and public goods all may also be the result of market failure. Merit goods are products or services that government feels that people left to themselves will under consume and which therefore aught to be subsided or provided free at the point of use. Also markets’ would not be able to provide them in the right quantities needed.
A good example of this would be schools and nurseries; they loud all be provided in the market place, separate from government financing, but not everyone would be able to afford them. De-merit goods are those that may not be in our best interests. These goods may include illegal drugs, alcohol, tobacco and even casinos. If left to the market alone, these goods would be over produced and consumed; therefore there is government regulation. Finally there are also public goods, which are composed of non-clubbable goods or services, such as the police force, hospitals and research and development.
All of these are a necessity and therefore the government has to fund them, if the market does not provide. The funding to the government would obviously come from the public through direct and indirect taxes such as VAT, and wage taxing. The other type of public good are non- rival goods, which are products or services that will have no competitors or do not compete in a market. A good example of this would be a lighthouse or a harbor. Still, these goods are a necessity. Factor immobility is also very important in identifying market failure.
There are two types of factor immobility and they are occupational and geographical immobility. Occupational immobility occurs when there are barriers to the mobility of factors of reduction between different industries and occupations. This can lead to people remaining unemployed, or Dealing uses In ways Tanat are not economically inclement. Labor as a factor of production often experiences occupational immobility. There are many workers that have worked in an industry, which requires them to be highly skilled in a certain craft.
When that industry becomes inactive, those workers are usually skilled, but not for other industries that could employ them. This is also called structural unemployment and is a major reason why there is a core of workers in the UK who find it difficult to find paid work. Geographical immobility exists when there are barriers to people moving from one area to another to find work. There are many reasons for this immobility, including; family and other social ties, costs involved in moving home, regional variations in house prices and differences in the general cost of living between regions.
The growing regional divide in house prices is a major influence to geographical immobility. Market failure can also be caused by the existence of inequality throughout the economy. The large difference of income and wealth in our economy leads a wide AP in living standards from affluent households, and those experiencing poverty. Society considers that too much inequality is unacceptable and undesirable. Ethics and equality is very important in market failure. Most firms and consumers are becoming increasingly concerned with their footprint on the world.
Firms want to be seen as being ethically correct, as this makes them look good, and user friendly. Also there are financial advantages such as tax breaks from governments. However, being unethical may also lead to a massive financial downturn of a firm, such as the case of Gap clothing, whereby sweatshops were found in India in 2007, making all the clothing. These shops had to be destroyed which was very expensive, and the public eye were aware of this, and many did not want to be associated with this unethical behavior. The final cause of market failure is fraud.
A good example of this is the Enron and World case in 2001/2002. This was a case whereby these two large multinationals where run by the same auditing company called Arthur Andersen. It was a case of extreme fraud of billions of US dollars. Inappropriate accounting, which was highly creative, and substantially falsifying figures did it. This affected the global economy, and there had to be world intervention to stop this by policy from all governments. The laws had to include standards on corporate governance. The Serbians Solely Act in USA is a good example of this.
Government intervention is very important in the preservation of the competitive equilibrium level. There are two ways that government can intervene, and these may be headed; shared principles or precise codified rules. In a set of rules, or an Act, there will be precise rules that an entity has to follow. There may be many rules to make the idea more clear, but there will always be a grey area whereby a loophole ay be found or a niche may be made as to benefit one individual or firm, but leave another at a disadvantage.
On such a big subject such as an economic market, it may be a better idea to have shared principles whereby the integrity and responsibility is put Into ten nanas AT ten market Ana ten Tells or Monolinguals, tons elongating a lot AT the grey area in precise rules. This will encourage economic growth by more freedom to advance, and may reduce the number of hurdles a new firm has to encounter when starting up, or an existing firm on the edge of insolvency.
However, as time goes n, more and more rules will be implied, due to the growing body and complexity of modern markets today. In all European economies, Seems represent in excess of 99% of the total business stock (peg. 29, Entrepreneurship & Small Firms, David Doeskins & Mark Freely), so as a government it makes much sense to support this sector of the economy as to avoid market failure. Further objectives to supporting Seems through policies will lead to Job creation, reducing unemployment.
There will also be a promotion of an enterprise culture, and finally it will aid in countering regional economic decline. The government provides support schemes to businesses with the aim of: encouraging innovation helping businesses develop, grow and succeed developing international trade increasing the Auk’s competitiveness and strengthening its economy There is a wide range of government support available to businesses, not only through grants and other funding but also through numerous advisory, guidance, information and other services, including training. Businesslike. Gob. UK) These services are being brought together for businesses in England under the new Solutions for Business portfolio as part of the government’s drive to streamline and amplify support for businesses. This new portfolio is still being developed. Deregulation and simplification in corporate laws on Seems may be an example of a hard support policy in encouraging, and aiding the development of these enterprises. This may include tax breaks, such as corporation tax, which is the taxing on profits.
This tax was reduced from 30% to 28% in the United Kingdom in 2008 (biked. Co. UK) Financial assistance is also very important in aiding the start up of an SEEM; this may be done by reducing the barriers to raising finance for your enterprise. An example of this can be to make it easier to get a loan. However, getting a loan from a bank in the current economic climate may not be easily accepted, so this policy may not be as effective as many others.
Legislation has also been introduced, whereby promoting competition in the market place. A good way of doing this is to regulate the amount of market share than one firm is allowed to dominate, which is 25% in the I-J. There are also many soft government policies that can support the SEEM sector of the economy. This may include information, education, and advice for new and potential enterprises. A lot of this information can be given out by means of government agencies, or through government websites.
On the whole I do feel that government intervention is essential for the establishment of Seems in our economy, especially the power that all of the enterprises nave collectively. As Seems immolate ten vast majority AT ten economy, they can be the reason for this economic recession. Therefore now it is crucial to give those potential entrepreneurs the encouragement, confidence and support they need in order to regenerate our economy. Without this, it is evident that market failure will be common.
It can be argued that the government policies already put in place have been very effective; however there have also been many criticisms in that there has been a lot of regional bias, in backing some enterprises and not others, making a clear divide between winners and losers. Government regulation has also been seen as a barrier to growth in this sector of the economy. However on balance, there is a fine line between financially helping the start up of Seems with softer rules on money lending and corporation tax, and the careful monitoring of bank loaning which has lead to the economic recession we are experiencing today.