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Final Chapter One Development Planning, Markett Failure and Government Intervention
Final Chapter One Development Planning, Markett Failure and Government Intervention
Development Economics II
By Teshome A.(PhD)
Introduction
• Development policy and planning play the major role in
achieving sustainable economic development.
• The objective of any countries is to realize sustainable
development thorough effective and efficient development
policy and planning.
• There are different ways of government intervention based on
different economic system
– Command economic system
– Market base economic system
– Mixed economic system
Concepts of development planning
• Public goods are those goods and services which exhibit the
characteristics of non-rivalry in consumption and non-
excludability.
• Public goods include defence, national parks, weather
advisories, agricultural extension services and so forth.
• These two conditions(non-rivalry and non-excludability)
imply that the market will not be able to provide the goods or
services efficiently, since markets function by excluding
individuals who cannot pay for the good.
• Budgetary provision of public goods is therefore required in
the presence of market failure.
Externalities
• Externalities occur when the activities of one person or firm
harms or benefits other people and the market cannot force the
individuals who create the harms to pay the costs of those
harms and the people who create the benefits cannot force
those who receive the benefits to pay for them. Thus, there are
negative and positive externalities.
– Negative externalities occur when producers or consumers
are able to shift some of their costs to the community.
– Positive externalities occur when the benefits of a good
are received by others in the community although they did
not pay for them. These benefits are not reflected in the
individual demand curve.
Imperfect Information
• Imperfect Information occurs when one party to a transaction
has more or better information than the other party.
• Absence of perfect Information can prevent consumers from
making fully informed decisions.
• Regulation requiring information disclosure or placing
restrictions on dangerous goods that can be used to address
this type of market failure.
– For example, when providing financial advice, financial service
providers are required to disclose information about significant
benefits and risks, and the fees and charges associated with
the financial products, as well as remuneration they receive
in relation to the services offered.
Argument for government intervention
• In general terms, there are three main arguments for
Government intervention
– efficiency arguments i.e. there are market failures which result in
inefficiencies in the allocation of resources. These inefficiencies mean
the mix of goods and services produced across the economy as a whole
diverges from the mix that would best meet consumers’ preferences (as
expressed by their willingness and ability to pay) in the absence of any
market failures;
– equity arguments, including distributional considerations of various
kinds goods and services;
– ethical arguments i.e. there may be boundaries to the role to be played
by markets irrespective of the efficiency of markets in allocating
resources.
The role of state in development
• A government(state) is a body that has the power to make and
enforce laws within an organization or group. In the broadest sense,
“to govern” means to manage or supervise, whether over an area of
land, a set of people, or a collection of assets. The primary duty of a
government is to reward the people who do good things and punish
the wrongdoers.
• Do we actually need government? Is it possible to live without laws
or rulers? Because man needs a moral limits, government is
absolutely necessary.
• The French poet, Paul Valery, was reported to believe that “if the
state is strong, it will Crush us; if it is weak, we will perish. The idel
role must, therefore be between these two extremes.
Cont.