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on government intervention in the market - Political Solutions Forum

About on government intervention in the market

Previous Entry on government intervention in the market May. 10th, 2006 @ 01:00 am Next Entry
for those of you with little background in economics or who forgot theirs, we have this principle called elasticity of demand. its the degree to which demand responds to changes in price.

if demand essentially remains the same irrespective of drastic increases in price the commodity is said to be totally inelastic.

a monopoly of one company over a necessary good can artificially impose demand inelasticity by setting the price as high as they damn well please and if people want the product by golly they'll pay for it.

Cigarettes, as brits and aussies found out from taxing the shit out of them, have a very low elasticity. the addiction is powerful enough to drive many smokers to purchase the same amounts as always even when prices get as high as 16 dollars a pack.

A more relevant commodity for discussion is Gasoline and Petroleum more generally, the products my previous post dealt with, which have a very low elasticity. That is to say our transportation infrastructure and economy are so heavily dependent upon them that demand will remain fairly stable or decrease only ever so slightly, to the point where in a situation where price rises too fast, we risk economic collapse.

The most outstanding example of what should come under discussion is the pharmaceutical industry, specifically prescription drugs and the healthcare economy more generally. the cost of prescription drugs is almost totally inelastic. demand does not respond to market forces, and nor does price. This is largely due to the necessary middlemen in the equation, most notably physicians but also insurance companies. where neither of these exist, as in over the counter drugs, prices respond to normal market forces. this is why drug companies will fight tooth and nail against the FDA changing their prescription drugs to over the counter classifications. This is a significant part of what accounts for the skyrocketing cost of healthcare worldwide. these skyrocketing costs, like the consistently rising costs of oil, threaten to eventually collapse the economy.

So the question to the political community on this issue regards government involvement in the economy. does the government not have a responsibility to correct for market failures of this sort (i.e. situations in which exceptional circumstances dictate that the market does not in any way shape or form in this instance behave the way it is supposed to) in a capitalist system to keep the market operating smoothly in the first place? Particularly in instances like these where such failings act as a metal bar thrown into the cogwheel machinery of a self-sustaining free market based economy?

Does the government not have a responsibility to acknowledge observable and consistent trends and anticipate their inevitable outcomes and plan accordingly? Does the government not have a responsibility to head of emerging crises before they become catastrophes?

Does the government not have a responsibility to stop individual entities which are acting against the public good, even if that means defiling the sacred cow and directly intervening in the market? Basic social contract theory as I understand it.

Most importantly, just how does a government go about doing this without merely causing more problems? How does a government respect the integrity of a free market system and solve the problem without upsetting the balance of market forces?

I personally like the idea of making price gauging illegal, assuming it is done properly, and preferably in tandem with a number of other measures as the situation warrants. It holds the potential to counterbalance the effect of those exceptional factors that confound the proper functioning of the market in the first place, but yet does NOT involve price ceilings (take note, lordbrand) or other artificial measures that disrupt the proper equilibrium of market forces.

more concrete suggestions like this one are most appreciated (pick your commodity if necessary). I'll give you an e-cookie if you dont spout off stupid partisan talking points and actually come up with some original ideas.

an xpost from politicsforum
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Date:July 18th, 2007 01:45 am (UTC)
As much as the socialist in my heart wants to say "yes", my mind tells me otherwise. These are very controversial issues. Your examples of "markets failures" prove it.

Take cigarettes (I'm a smoker, so it's a hot topic). Isn't it the governments, be it a town, state or federal, who goes all populist (as the smokers are a minority) and, like you said, "taxes the shit out of them", plus humiliate the smokers by refusing them the right to enjoy legally purchased product even outdoors, or in their own homes, like in Belmont, CA? On the other hand, there is market competition, and the manufacturer can raise the prices only so much - after all, tobacco is not heroin, and few people will steal and rob, if they can't afford to buy. Zero price - no profit, infinite price - no customers - no profit, so there must be some optimum number in between. This is market.

Oil and big pharma are the biggest lobbyists (and I don't blame them, corporations exist to make profits). Besides "legal" ways of lobbying, there is also corruption. So if government starts regulating the prices, it may become easier to bribe some buareucrat than compete in the open market. These companies are huge, but there is competition, and they can dictate the price only so much - see above. If it comes to a real oil crisis, it will be too late to regulate the price, it will be time to regulate the consumption, like during the war. Plus again, the governments already "tax the shit out of oil", why else the gas prices in Europe are so much higher than in U.S.?

I kinda liked tabula_rasa's point about oil prices. No matter how hard you try to persuade people to switch to alternatives, it will happen when it'll become economically justified, no sooner, no later. You'll just notice one day that gasoline cars are becoming extinct, with no pressure from the government or green party.

So the answer is "no"? wait a sec, no so fast. I come from Russia, where the fast transition to free market was a disaster for most of the people. Without government interference, it would be, probably, communist again, or fascist, or fell apart. As much as everybody likes to throw dirt on Yeltsin and Putin, they are walking the 100,000,000 country through a narrow path between tyranny and chaos.

Closer to your topic: it was admitted that in country like Russia, there are "natural monopolies", which are:

- Ministry of Railroads (Russia's transport system relies heavily on railroads, the highway system doesn't exist beyond the very central region);
- Electric production and distribution: so complex and centralized that it could be destroyed in one day, but impossible to rebuild in 20 years;
- Natural gas production and distribution.

Everything else was auctioned and privatized in several years (lightning fast), but these three are critical things, basically keeping the country together and population alive.

So, instead of breaking them in pieces and selling, as was suggested by liberal economists extremists (and World Bank, by the way) the Russians preserved the monopolies and didn't privatized them completely. Private capital got 49%, the government kept 51% and decisive voice in the Boards of Directors (oil companies were set free, but now it's being reverted -- the amounts of money and influence in oligarchs hands became too big a threat).

Next, the government did what tabula_rasa said is their job - stayed in power, which, if you're not Hitler or Stalin, is impossible without keeping your population's life conditions at least bearable. This meant, keep internal prices reasonable, make more profits on exports, assume responsibilities that Soviet system historically placed on enterprises (social infrastructure, retirement funds, etc.)

I hope you get my point. Sometimes you can't avoid government's interference and regulation, sometimes it's plain harmful. But when there is the right reason to interfere, government should step in and do it's job. Like FDR during the Great depression. Or the Brits, Canadians and everybody else creating universal health care systems.
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Date:July 9th, 2012 04:32 am (UTC)
I dont click on youtube links lazy commenters post in lieu of saying what they want to say
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