"Government has no business to do business". Could this be practical?

Introduction

Well the above line was spoken by our honourable PM Narendra Modi. He further added that the role of government is to provide necessary infrastructure to all. He says any government's job is to think about food for the poor, make houses and toilets for them.

But is it practical? Could there be any scenario where government intervention may be needed?

I recently had an opportunity to be a part of Global Governance Initiative's cohort where-in I got the chance to understand & learn various aspects & day-to-day journey of Public Policy, Management Consultancy & Product Management.

And to my benefit, the following topic was also discussed which would help us solve our above query. And that discussion is what inspired me to write this blog.

The topic was "Types of market failures when government should intervene".

What is a market failure?

In economics, it is said that,

If markets are working properly, the price of something will result from the differences between supply and demand. So, a dysfunctional market would be one in which prices are unreasonable. An example will be if a product has inflation much higher than its actual value.

A market failure occurs when prices do not match reality. In this distorted market, prices do not represent the supply and demand of a service or product correctly, and there’s a mismatch between individual needs and supply in a free market. The most common examples and types include missing markets, monopolies, externalities, etc.

Source : Market Failure - What Is It, Examples, Causes, Types, Solutions (wallstreetmojo.com)

Alternatively, we can say that the price is based on the supply & demand of a product. However, due to irrational behaviour or circumstances such price could not be ascertained or if ascertained then the price itself is not in line with the value it provides. Hence, leading to market's inability to clear the product or inability to conduct sale & purchase transactions of that product.

Types of market failures

1. Information asymmetry : This means that buyer & seller have access to different information sets. Example could be of share market, some investors in close proximity of key managerial personnel in a company might have access to some insider information which is not made public yet. Hence, he could benefit on that information leading to losses to unaware public. Thus, people will not be willing to buy or invest in stocks.

2. Behavioural problems : This means people are not willing to change their beliefs & mindsets. Best example could be people not insuring their life as they consider it as cost in case they do not die. Hence, government created EPF, ESI along-with ULIP which gave life insurance along-side investment returns.

3. Agency effect : This means that people have different incentives to act in different directions. Example : a bank earns by giving loans at a higher rate of interest than what they pay on saving deposits. However, in a area where people in general do not have a habit of borrowing, a branch manager would be reluctant to accept & open their savings account because he would start incurring costs without income, hence leading to bad KPIs. Another example could be telecom companies not servicing remote corners of the country to avoid large capital investments due to limited customers who would generate revenue leading to losses. Hence, it becomes the job of government to draft regulation, policy or itself get in the action to provide its citizen with the required infrastructure.

4. Excluded economy : Another major concern is that the transactions happen outside formal & banking channels leading to loss of tax revenue for the government & making it difficult to track the money. Best example would be government now creating a portal for consumers to upload invoices & get rewards based on lucky draw. This would lead to consumers forcing sellers to issue invoices & accordingly making the transaction to shift from excluded to included economy.

5. Anti competitive market : Examples are monopoly & oligopoly where the seller(s) could take control of the market. Herein it is imperative for the government to intervene to prevent exploitation of consumers.

Apart from the above there are some more cases of market failures but due to extreme technicalities it would be best if we avoid them for the moment.

Conclusion

Thus, I hope I managed to throw light on the topic that although on a day-to-day basis government may exit various businesses in the free market but we will forever require them as a backup in case anything gets unfavourable.

Hope it was a good read!!! Do like & share with your friends if you liked it.

Thanks!