An analysis of the effectiveness of regulation on the part of the state in the face of its specific structures allows us to conclude that the actual results of the implemented policy may noticeably differ from the expected consequences. This makes it possible to develop many discussions related to the functions of the state and the failures of the state. We will discuss this topic in the article.
Historical aspect
Calls for the restriction of state activity in the economic field were first voiced even during the development of a market-type economy. For example, the considerations of the supporters of the physiocratic school are known, according to which the most important state tasks should include the full provision of conditions for unlimited and free competition. The most important place in the work of classical economists was the denunciation of the extremely large expenses of the federal monarchy, which were unproductive. It is worth noting that it was the classical theory that introduced significant adjustments regarding ideas about the functions of the state and failures of the state in a market economy.
A. Marshall developed the concept of external effects or, in other words, externalities. The English economist showed that they are able to significantly limit the scope of market regulation. It is worth noting that A. Pigu, a student and follower of A. Marshall, demonstrated that the discrepancy between the values of the public and private marginal products that appears due to these effects does not allow normal processes in the economy to ensure a possible increase in national income. These considerations have become a kind of basis for the formulation of the well-known term market failures (state failures), the presence of which forces many authors to attribute the settlement of these problems to state functions.
The real expansion of the tasks of the government in the last century was obviously caused not so much and not only by these theoretical considerations. We are talking about quite serious upheavals in public life, which were associated with two world wars and, as a result, the Great Depression developing at that time. However, even after the Second World War ended and, accordingly, military expenditures declined, for three decades (50-70s) there was a very distinct tendency to increase the state role in the economy of industrialized countries. It is worth adding that the provision presented primarily applies to colonial countries.
The consequences of historical events
In the process of studying the historical aspect of state functions and market failures, it is important to draw conclusions. Thus, the theoretical model that characterizes state behavior, not only in practice encounters many facets of difficulty, which are associated primarily with attempts to uniquely determine in quantitative terms the welfare of society, as well as with how much in reality it is possible to reveal the initial information regarding the preferences of individual participants in the study process. Through models of a theoretical plan, L. Gurvich convincingly demonstrated the fact that the functioning of decentralized mechanisms of a market nature makes slightly less demands on the initial information that is needed. However, market forces, in accordance with their nature, are not able to provide an adequate supply of a range of public services. For this reason, questions inevitably arise: what mechanisms can be applied to maximize the well-being of society and is practical control over the operation of these mechanisms real? Answers to the questions presented to some extent will smooth out the failures of the state in a market economy. You need to know that they exist to this day. Moreover, the reasons can be very different.
State failures: types
The state fiasco should be understood as the case of inefficient distribution and use of public resources by the state. Today, there are four main reasons for the failure of state regulation of the economy in a systematic manner, as well as the absence of the fact of achieving the goals. It is in accordance with them that varieties of state failures and the possibilities for their correction are formed. So, the key reasons are the following:
- Imperfection of policy in the state and related processes.
- Limited control over bureaucracy.
- The lengthy process of making and implementing political decisions over time.
- Limited level of control related to private sector response.
It is advisable to consider the causes and failures of the state in the economy in more detail.
Role of information
Since the identification of the course of economic policy in the broad sense of the word requires the maximum completeness of information, in the process of analyzing the economic functions of the public segment, the starting point is the solution of problems associated with the collection and subsequent processing of information that is necessary to select certain areas of the state’s activity. It is worth noting that the situation in this area is fundamentally different from the traditional practice of private enterprise. As a result of the analysis of the functioning of market mechanisms, one can see how economic theory reflects this. In the process of interaction of forces of a competitive nature, the real preferences of independently acting participants are determined. It must be added that the accumulation of relevant information is inseparable from operations related to the sale and purchase of marketable products, rental of real assets and so on.
When state-owned companies carry out more or less standard market operations, the reaction is more flexible. If the state provides services that cannot be provided by the market, in other words, through the production of public goods, there is simply no information regarding the preferences of the participants. You should be aware that the author of the most interesting concept of identified preferences, P. Samuelson, cited the following fact: it is almost impossible to imagine mechanisms to identify preferences that relate to the choice between the benefits of public importance. It is advisable to include much of the above into the distribution policy of the state, including the endowment of private goods.
What are the difficulties?
From the foregoing, it can be concluded that the occurrence of difficulties is urgent both in determining and appropriately applying information regarding the preferences of all participants, and in creating a base on which the activities of the state should be based, as well as procedures for the selection of society. It should be noted that in practice this is primarily manifested in excessively vague and general recommendations of a theoretical nature regarding desirable state activity. These recommendations are difficult to interpret clearly. This is not only about those formulations that are designed to characterize general state goals in the field of economics, but also about the definition of tasks of a particular type of certain institutions of national importance.
It is advisable to dwell on the issue related to incentives that encourage politicians to find additional information in order to avoid state failures. In accordance with the theoretical model of competition between private entrepreneurs, it is understood that participants in the economic process can, for example, discover, through trial and error methods, additional opportunities for the implementation of the most effective commercial plan operations. It is worth noting that rivalry in the field of politics in non-democratic countries is somewhat limited. However, even in a democratic society, it is far from always possible to thoroughly study the real preferences of society and to identify the most remarkable ways of satisfying the corresponding needs.
In this regard, it is worth paying attention to the problem of criteria for the economic activity of the state, which may serve as one of the reasons for the general failure of the state and the market. It must be borne in mind that a number of proponents of the theory of public choice, who are convinced of the validity of the analogy with the operations of the market plan of a private businessman, observe the difference between them in success criteria. Thus, the imperfection of the alleged mechanisms of a political nature, the excessive durability and aggregation of the reaction, as well as the destructiveness of populist politics, play a huge role in the issue. As a result, political cycles appear, which are one of the causes of market failures and state failures. It is worth noting that the choice of popularity among voters as a criterion of competent policy, in many respects encourages a revision of the characteristics of the course of public policy.
Imperfection of public policy
As it turned out, one of the reasons for the general failure of the state and the market is the imperfection of the political process. This alignment is primarily associated with the limited and asymmetric in obtaining the information that is necessary for decision-making. We have examined this issue in detail in previous chapters. It should be remembered that the decisions that the government makes are far from always based on complete and accurate data. The asymmetry of information gives advantages to those who own information to a greater extent. In addition, the imperfection of the processes taking place in politics can be explained by logrolling, lobbying, seeking political rent, excessive populism, and the lack of motivation in making political decisions that will become effective.
The flaw (failure) of the state also presupposes the existence of rational disregard. By it should be understood the deliberate evasion of some public part from participating in elections or other political votes that are possible. The main reason here is that the positive benefits and effects received by voters at the most favorable outcome are considered insignificant. They are estimated, as a rule, below those costs that are considered relevant in the event of participation in the vote.
Suppose the government is considering lowering subsidies for an industry, which, according to experts, will bring certain benefits to the national economy in general. In case of a positive decision, many members of the society will receive very insignificant benefits, because the benefit as a whole will be distributed to the whole society. That is why some part of the population will rationally ignore this political decision. However, as a result, a minority of voters directly related to the industry will suffer significantly if a decision is made on limiting subsidies. One way or another, a case is a great example of a failed state. The situation will lead to the creation of pressure groups and, of course, to lobbying the interests of individual industries.
Consider another situation. For example, social preferences are revealed. However, the question arises in the methods of financing state events, which are outlined according to these preferences. This could be another barrier to a prosperous state. In the classic work, which is devoted to the problems of fair taxation, E. Lindahl proposed a theoretical scheme in accordance with which it is assumed: the amount of tax payments that are made by participants in economic relations is directly dependent on their preferences. It is worth noting that this approach extends the standard principles of market relations between private representatives to the field of finance at the state level and treats tax payments as personalized (individual) prices of services that are provided by the state. However, then individuals and legal entities do not receive sufficient benefits from the implementation of the project in question or do not agree with the accepted methods of financing it, may refuse to pay taxes. It is obvious that here the most important feature of tax financing is completely ignored - its compulsory and universal nature.
Limited control over bureaucracy
Government failures include cases that arise due to limited control over the bureaucracy. It is worth noting that even a small-scale bureaucratic apparatus is a complex multi-level structure. Decisions that are made at the upper level are far from always being effectively developed and implemented at the lower levels. Moreover, local authorities can significantly change the direction and meaning of legislative acts or government decisions.
For example, the parliament of the country decides to tighten national environmental legislation to fully protect the environment. Technical standards and details in this case will be finalized by a state agency that specializes in this. This raises the main problem: how to ensure that administrators, one of whose duties is the execution of decisions made, do so in an efficient and impeccable manner, because delaying the process, as well as providing excessive benefits, can minimize parliamentary intentions.
Within the framework of this paragraph, it is also advisable to single out such a reason for state failures in the economy as dishonesty and dishonesty of state officials. Sometimes, in connection with the pursuit of their personal interest, they are aimed at obtaining the maximum number of votes in the upcoming elections. So, officials make populist decisions that do not meet the criterion of economic efficiency. In addition, government officials are representatives of the bureaucratic apparatus and, at the same time, are ordinary people. They may find themselves in a situation in which the personal benefits of a decision will be so great that they will exceed a sense of duty and fear of punishment, which is not excluded.
Limited control over private sector response
Studying the failures of the state and their correction, it is advisable to note such a reason as a limited level of control over the response of private institutions. It is worth knowing that any country is endowed with a private sector, which is difficult to influence. This can lead to the inability to fully anticipate the consequences of decisions approved by the state. It is important to note that this failure of the state is relevant throughout the entire time of its existence. The desire to improve the functioning of the market often leads to the opposite result. For example, in order to combat speculation, the state sets fixed prices for some commodity products. However, this leads to a shortage of goods, as well as queues. A black market is forming, which means that the state is failing.
It is advisable to give an appropriate example. So, in 1696, a window tax was introduced in England. It is worth noting that at that time it was quite difficult to technically determine the amount of public income, this made the introduction of fair income tax payments unfeasible. The windows were luxurious. There were more windows in the homes of the rich than in the homes of the poor. This fact was a good criterion for determining income. As a result, the developed tax base was considered fair. With its introduction, there was no task to leave home without sunlight. Nevertheless, in order to reduce tax payments, people began to reduce the number of windows in their homes. This failure of the state refers to the excellent examples that existed in history. , .
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It is worth noting that the internal lag leading to the failure of the state is associated with the time that elapses from the moment the problem appears to the development of certain measures to eliminate it. Its duration is revealed through a number of factors. First of all, it takes time to recognize the problem, further analysis of the causes of its occurrence. For example, to create an anti-inflationary policy that will be effective, it is necessary to provide an assessment of the level of inflation, as well as the reasons for its occurrence. It should be clarified that even more time passes in the formation of measures of a specific nature. So, in the process of reforming the legislation in the field of taxes and fees in order to increase business activity, it is necessary to conduct a large number of consultations with experts and approvals at various levels.
The external lag is detected through a time period from the moment the government program is adopted, which includes instruments and areas of influence, until the object of state regulation begins to undergo changes due to measures taken. You need to know that the external lag can be a significant period of time, for example, in the case of lower tax rates, a real recovery of the economy does not occur immediately.
Conclusion
So, we examined the concept, definition, causes and features of such a category as state failure. In addition, they cited vivid examples and found out what does not apply to the failures (fiasco) of the state. In conclusion, it should be noted that the market mechanism and government regulation under no circumstances are opposed to each other - they are additions. A market cannot function normally without a state that determines the rules. It must be borne in mind that competent regulation by the state allows us to get rid of and close those shortcomings and failures that cannot be made up when using only the market mechanism.
However, today there are objective boundaries of state intervention in the private sector and the market economy, as well as state failures, which we examined in detail in the article. It is important to know that the theory of public choice reveals the relationship between economics and politics, and also explains the specifics of making and approving decisions of a political plan. It is worth remembering that it is this knowledge that is the prerequisite for creating a successful strategy for the impact on the economy by the state.