Economic inefficiency

Name(s):

Imperfect market operation

Market imperfections

Lack of protection by free markets

Failure of markets

Economic inefficiencies due to restrictive business practices

Limitations of free markets

Nature

Free markets underprovide public goods such as national defence, law and order, primary education, basic health, infrastructure, and research and development, namely goods that benefit people other than the producers or consumers. Equally markets can overproduce goods that impose costs beyond those borne by the producer: traffic congestion, pollution, the depletion of natural resources, [etc]. In addition the existence of monopolies, the lack of fully developed markets (especially for capital and insurance), and gaps in the supply of information may result in inefficient resource allocation and yield savings and investment rates that are less than optimal. Market mechanisms may thus produce insufficient growth as well as macroeconomic imbalances, such as balance of payments deficits and underemployment.

Restrictive business practices tend to interfere with the efficient use of economic resources and thus reduce economic growth and welfare, with particularly adverse effects on developing countries. Such practices include: cartel activities; export prohibitions; agreements on market distribution and allocation; tying of the supply of inputs including raw materials and components; restrictions specified in contracts for the transfer of technology; arbitrary transfer pricing between the parent company and its affiliates; monopoly practices.

Incidence

In the 1990s, as Japan struggled to revive its economy and avert a global recession, it was under enormous pressure to make itself more efficient and thus stimulate a new burst of economic growth. But it found itself profoundly torn, for efficiency would come at the price of egalitarianism and other values that many Japanese regard as at least as important as economic growth.

Claim

1. Conventional economic wisdom holds that freedom of enterprise and the profit motive produce economic efficiency. This is correct to the extent that economic theory defines such efficiency in precisely the way that those intending to maximize the return on their investment would wish. But when efficiency is defined as applying existing productive capacity to meet existing human needs, then it is immediately apparent how inefficient the global economic system presently is.

2. Both the International Monetary Fund and the World Bank impose upon developing countries draconian measures designed to promote economic growth and stability, most often at the price of extreme human suffering and environmental damage. Such measures fly in the face of the best learnings of the developed world about the need to manage economic development carefully if the populace and the environment are to benefit in the long run.

Broader

Inefficiency

Economic underdevelopment

Narrower

Unsatisfactory retail banking

Restrictions on market access

Imperfections of capital markets

Inefficiency of financial markets

Inappropriate uncontrolled markets

Ineffective economic structures in industrial nations

Economic dependence upon socially undesirable activities

Irresponsible international trade