The socially inefficient distribution of resources in a free market is the cause of market failure. Externalities, monopoly power and information asymmetry are just a few of the many causes of market failure.
Governments are tasked with ensuring markets function smoothly.
Monopoly Power results when a single firm or group of firms dictate the price of output in the market. This arises from factors like economies of scale, brand recognition or ownership of key resources. High market power firms restrict competition, maintain price discrimination, discourage innovation and often encourage rent-seeking activity – all of which impact consumers’ standard of living. Furthermore, incumbent businesses influence policymaking to support regulations that restrict new entrants.
Information Asymmetry gives the party with less information an unfair advantage. Due to the risk of purchasing “lemons” (something worthless or unsatisfactory), buyers and sellers may become reluctant to engage in transactions, which could lead to market breakdown. More often than not, parties to a transaction end up spending money on costly safeguards like hiring consultants to avoid making bad purchasing decisions. Also, consumers with less market information have limited choices, which can result in paying higher prices.
In addition, market externalities occur when producing or consuming a good or service affects third parties not involved in the transaction, either positively (positive externality) or negatively (negative externality). It also happens when a common resource is overused or depleted due to lack of clear property rights or government regulation. The incidental costs impose additional costs not included in the market price of goods and services.
Government’s Role in Correcting Market Failures in Kenya
Addressing market failures is critical to reducing living costs by drawing attention to inefficiencies and unfairness that greatly impact consumers in the market system. By identifying and addressing market defects like unequal market power, information asymmetry and externalities, the government can undertake targeted interventions that enhance market efficiency and promote fair outcomes for all. These actions benefit consumers through more affordable, higher-quality goods and services by boosting competition, improving information access and minimizing detrimental impacts on society.
The government’s role in fostering a well-functioning market is anchored in Vision 2030. A key goal of Vision 2030 is developing a robust private sector capable of driving economic growth and being globally competitive. One of the Vision’s pillars focuses on improving the business environment by lowering costs, simplifying regulations and enhancing access to finance and technology to provide more opportunities for micro and small enterprises (MSEs). Lower entry barriers for MSEs have been achieved through Huduma Centres that offer one-stop business registration, SME credit guarantee programs ensuring MSEs can access commercial financing, and strengthening the intellectual property rights framework. As a result, they can now more successfully compete in the market, access reliable financing and reap rewards from R&D investments. By increasing the number of players in various industries, these investments encourage smaller businesses to innovate and boost efficiency to compete with larger ones and reduce market concentration.
To enable MSEs to overcome structural obstacles and effectively participate in markets, the Bottom-Up Economic Transformation Agenda focuses on policy reforms supporting equitable growth and development. For instance, the Hustler Fund initiative provides small business loans, enabling access to ready funds at very low interest rates.
On information asymmetry, the government has passed laws and regulations like the 2012 Consumer Protection Act. Under the Kenya Consumer Protection Advisory Committee’s direction, the Competition Authority of Kenya is primarily responsible for enforcing the Act’s provisions and addressing unfair trade practices like false advertising, misleading claims and deceptive marketing techniques. Mandatory disclosure regulations also ensure consumers receive accurate, comprehensive product information by establishing industry standards. To enable informed decisions, product labeling regulations require producers to disclose specific information on product labels like ingredients and nutritional content.
In addressing market externalities, the government has implemented policy, legislative and regulatory frameworks to regulate them. For instance, the National Environment Management Authority has set standards for industrial emissions and effluents to control negative externalities from air/water pollution and waste disposal. Moreover, using tax as a regulatory instrument to manage externalities has been very effective. For example, taxing plastic bags, along with a Ksh 4 million fine or 4-year jail term for violations, has considerably increased use of alternative packaging. Since the ban, NEMA estimated plastic bag use decreased about 80%. Furthermore, alcohol and cigarette taxes deter consumption, lowering associated negative health and social externalities. Kenya’s 2018 excise duty on cigarettes was 49.12% of retail price, which may have deterred tobacco use.
In conclusion, since developing nations have so few resources, government’s role in addressing and correcting market failure is unavoidable – that is, if a market fails, a government can always step in and fix the problem.
Email your news TIPS to editor@thesharpdaily.com
