case study of market economy

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Market Economy Examples: Case Studies, Countries, and Success Stories

A market economy is an economic system in which the production, distribution, and pricing of goods and services are determined by the forces of supply and demand. It is characterized by private ownership of means of production, individual decision-making, and a focus on efficiency and productivity.

One example of a market economy is the mixed economy of New Zealand. This country operates with a market-based system while also allowing for government intervention in certain sectors such as healthcare and welfare. The government in New Zealand plays a role in ensuring that its citizens have access to essential services and resources.

In a market economy, producers and consumers interact in a free market, where prices are determined based on supply and demand. The motive of producers is to maximize profits by producing goods and services that meet the needs and wants of consumers. Consumers, on the other hand, have the freedom to choose what to buy and where to spend their money.

One of the key characteristics of a market economy is the absence of government control over pricing and production. Unlike in a command economy, where the government has centralized decision-making authority, in a market economy, production and pricing decisions are made by individual producers and consumers. This allows for competition and innovation, as producers are motivated to provide the best products at competitive prices to attract consumers.

Market economies have proven to be successful in many countries around the world. They have been associated with higher levels of economic growth and prosperity. However, it is important to note that market economies are not without their challenges. Income inequality, lack of access to basic necessities for some individuals, and the potential for market failures are all issues that need to be addressed in order to ensure a fair and equitable society.

🔔 Understanding Market Economies

A market economy is an economic system in which the production and distribution of goods and services are primarily determined through the interactions of buyers and sellers in competitive markets.

In a market economy, individuals and businesses own and control the means of production. They decide what to produce and how much to produce based on their own interests and the demands of consumers. The government’s role is limited to establishing the rules of the market and enforcing property rights.

Market economies rely on the price mechanism to connect producers and consumers. Prices are determined by supply and demand, and they serve as the signals that guide resource allocation. When the demand for a good or service is high, prices rise, indicating that more production is needed. On the other hand, when demand is low, prices fall, prompting producers to reduce production.

In 2021, the top 25 nations with the most market-oriented economies, according to the Index of Economic Freedom, were mainly developed countries such as Hong Kong, Singapore, New Zealand, and Switzerland. These countries have relatively low government intervention and high levels of economic freedom.

Benefits of Market Economies

• Efficiency: Market economies are generally more efficient than planned economies. The profit motive encourages producers to allocate resources efficiently and produce goods and services that consumers demand.
• Wealth creation: Market economies have been historically successful in creating wealth for nations and individuals. The ability to own and acquire property, invest, and innovate has resulted in increased productivity and economic growth.
• Choice and competition: Market economies offer consumers a wide range of choices and foster competition among producers, leading to better quality products and lower prices.

Differences between Market, Command, and Mixed Economies

In a command economy, such as the one in North Korea, the government exercises extensive control over the allocation of resources and the production of goods and services. The government determines what is produced, how much is produced, and how it is distributed. Individual choice and private ownership are limited.

In mixed economies, such as Canada, both the private sector and the government play a significant role in economic decision-making. The government provides certain public goods and services, such as healthcare and education, while leaving other economic activities to the market.

Market economies have proven to be the most effective method for creating wealth and providing citizens with the goods and services they need. While there may be occasional market failures and shortages, market mechanisms and competition generally lead to efficient outcomes.

🔔 Market Economy Case Studies

Market economies are characterized by the presence of free markets, where goods and services are exchanged based on supply and demand. In this system, individuals and businesses make decisions about what to produce, how to produce, and how to distribute goods and services. The market economy is defined by private ownership of property and assets, and wealth is generated through market transactions.

New Zealand

New Zealand is often cited as a successful example of a market economy. The country shifted from a heavily regulated economy to a more market-oriented one in the 1980s. As a result, New Zealand experienced significant economic growth, improved productivity, and increased living standards. The government implemented reforms to reduce trade barriers, deregulate industries, and promote competition. This allowed the market to allocate resources efficiently and incentivized businesses to innovate and adapt to market conditions.

Sweden is another example of a market economy that combines free markets with a strong welfare state. While the Swedish government provides healthcare, education, and social security services, the majority of the economy is driven by market forces. Swedish citizens enjoy a high standard of living, and the country is known for its innovation and high-tech industries. The government plays a role in regulating and ensuring that markets are fair and competitive, but businesses are largely privately owned and operated.

China’s transition from a planned economy to a market economy has been one of the most significant economic transformations in recent history. The government implemented economic reforms in the late 1970s, allowing market forces to play a larger role in the country’s economy. This shift resulted in rapid economic growth and lifted hundreds of millions of people out of poverty. While the government retains control over key sectors and industries, such as banking and energy, China’s market-oriented reforms have unleashed the entrepreneurial spirit and productive capabilities of its population.

Market economy case studies provide valuable insights into how free markets can contribute to economic growth, innovation, and improved living standards. New Zealand, Sweden, and China are examples of countries that have successfully implemented market-oriented reforms to stimulate their economies. While each country has its own unique approach and challenges, the common denominator is the emphasis on market mechanisms and the role of the private sector in driving economic activity.

🔔 Successful Market Economies

In a market economy, the revision and work is driven by the common motive of profit, with individuals and businesses making decisions based on supply and demand.

Many nations have embraced market economies, reducing or eliminating central planning and allowing the free market to determine prices and production. These countries have seen success in various industries.

One example of a successful market economy is New Zealand. In the 1980s, the government-owned industries were privatized, and market forces were allowed to dictate decision-making. As a result, New Zealand experienced economic growth and reduced shortages in various sectors.

Consumers in New Zealand also benefited from a free-market economy. Without government interference, businesses were able to meet the needs of consumers more efficiently and at competitive prices.

Healthcare Systems

Another example of successful market economies is seen in the healthcare systems of many countries. In a market-based healthcare system, the production and pricing of healthcare services are determined by supply and demand.

Market economies in healthcare allow for competition among providers, leading to a greater variety of services and lower prices for consumers. When healthcare decisions are driven by market forces, resources are allocated efficiently and based on consumer preferences.

Market economies also incentivize innovation and technological advancements in healthcare, as providers strive to attract consumers and gain a competitive edge.

Mixed Economies

It’s important to note that not all successful economies operate solely on free-market principles. Many countries have mixed economies, which combine elements of both market and command economies.

In mixed economies, the government plays a role in regulating certain industries, providing public goods, and addressing market failures. However, the majority of production and decision-making is left to the market forces.

Examples of successful mixed economies include countries like the United States and Germany, where a balance is struck between government intervention and free-market principles.

Defining Success

The definition of success in market economies can vary depending on the economist and their perspective. Some economists may focus on GDP growth, while others may prioritize income equality or environmental sustainability.

Overall, successful market economies are characterized by efficient allocation of resources, high economic growth, innovation, and improved living standards for their citizens.

In conclusion, market economies have proven to be successful in many countries when the decision-making is driven by market forces and business incentives. Whether operating on a free-market or mixed economy approach, the top market economies have seen significant economic and social advancements.

🔔 Market Economies vs. Planned Economies

Market economies and planned economies are two different systems for organizing and managing economic activities within a country. While market economies rely on free-market principles and individual decision-making, planned economies are centrally controlled by the government.

Defining Characteristics of Market Economies

In a market economy, the production, distribution, and pricing of goods and services are primarily determined by the interactions of buyers and sellers in the marketplace. The government’s role is typically limited to ensuring fair competition, protecting property rights, and enforcing contracts. Some defining characteristics of market economies include:

• Allocation of resources based on supply and demand
• Private ownership of businesses and property
• Freedom for individuals to make economic decisions
• Prices determined by market forces
• Profit motive driving economic activity

Defining Characteristics of Planned Economies

In a planned economy, the government controls the means of production and makes decisions about what goods and services should be produced, how they should be produced, and to whom they should be distributed. Some defining characteristics of planned economies include:

• Centralized control over economic activities
• Government ownership of businesses and property
• Government setting production goals and timetables
• Prices and allocation of resources determined by government planning
• Emphasis on collective goals and equitable distribution

Comparison of Market Economies and Planned Economies

Market economies and planned economies differ in several key aspects:

• Decision-Making: In market economies, decisions are made by individuals and businesses based on supply and demand. In planned economies, decisions are made by the government according to its goals and priorities.
• Ownership: Market economies emphasize private ownership, allowing individuals and businesses to own and operate their assets. In planned economies, the government owns and controls major industries and resources.
• Pricing: Market economies rely on the free-market system to determine prices based on supply and demand. In planned economies, the government sets prices and determines the allocation of resources.
• Efficiency: Market economies generally promote efficiency by allowing competition and the pursuit of profit. Planned economies focus on meeting the needs of the society as a whole, prioritizing social welfare over individual profit.

Examples of Market Economies

Most countries in the world have market economies to some extent. Some examples of countries with market economies include:

• United States
• United Kingdom

Examples of Planned Economies

Planned economies have been less common historically, but there have been several notable examples in the past:

• Soviet Union (until its dissolution in 1991)
• China (until economic reforms in the late 1970s)
• North Korea

In summary, market economies and planned economies represent two different approaches to economic organization. Market economies rely on individual decision-making, private ownership, and market forces to allocate resources and determine prices. Planned economies, on the other hand, are centrally controlled by the government, with decisions made at the national level according to planned goals and priorities.

🔔 Examples of Planned Economies

In contrast to market economies, which are driven by supply and demand, planned economies are systems where the government controls most aspects of economic activities. Here are some examples of planned economies:

1. Command Economy

In a command economy, the government directs all economic activities. It decides on production levels, resource allocation, and pricing. Examples of command economies include North Korea and Cuba.

2. Socialist Economy

Socialist economies have a central planning structure where the government determines production and distribution. They aim to address social inequalities through resource redistribution. Countries like China and Vietnam have socialist economies.

3. Mixed Economy with Central Planning

Some countries combine elements of both planned and market economies. While they still have a central planning structure, they also allow for some market forces in decision-making. China, for example, has transitioned from a purely planned economy to a mixed economy.

4. Former Soviet Union and Eastern Bloc

During the Cold War, several countries in the Soviet Union and Eastern Bloc operated under planned economies. The government controlled all aspects of production, and resources were distributed based on the needs defined by the government rather than consumer demand.

5. War-Time Economy

During periods of war, some countries adopt a planned economy to efficiently allocate resources for the war effort. This involves central planning and directing resources towards military production rather than consumer goods. Examples include the United States during World War II.

6. Ancient and Pre-Modern Planned Economies

In ancient and pre-modern times, some civilizations operated planned economies. For example, the Inca Empire in South America organized production and distribution based on the needs of society as a whole.

In summary, planned economies differ from market economies in terms of the central planning structure, pricing, decision-making, and ownership of property. While market economies rely on the invisible hand of supply and demand, planned economies aim to address social inequalities through government control and resource redistribution.

🔔 Comparing Market and Planned Economies

When it comes to economic systems, there are two primary models that countries operate under: market economies and planned economies. These two methods of organizing an economy have significant differences in terms of decision-making, resource allocation, and the role of the government. Let’s explore the contrasting features of these systems.

Market Economies

In a market economy, decisions about production, distribution, and pricing are primarily determined by the interactions of supply and demand. Here, individuals and businesses are free to engage in economic activities based on their self-interest. This means that the government’s role is typically limited to creating and enforcing regulations that ensure fair competition and protect property rights.

Market economies allow for the free movement of goods, services, and labor. Prices are determined by supply and demand, and they serve as signals that guide producers and consumers in their decision-making. Producers respond to higher demand by increasing supply, leading to a better allocation of resources and increased productivity. In contrast, if demand decreases, producers reduce supply accordingly.

One notable feature of market economies is the role of competition in driving efficiency. Companies are forced to improve their products and services in order to attract and retain customers. This constant drive for innovation and efficiency is a key driver of economic growth.

It’s important to note that market economies don’t guarantee equal outcomes for all citizens. The distribution of wealth and resources can vary significantly, depending on factors such as skills, education, and luck. Some individuals may thrive and accumulate wealth, while others may struggle to meet basic needs.

Planned Economies

In a planned economy, also known as a command economy, the government takes a more central role in making economic decisions. The government determines what goods and services are produced, how they are distributed, and at what prices. This system is characterized by centralized planning, where a central authority, such as the government, dictates production quotas and allocates resources.

Planned economies aim to address the inequalities and inefficiencies that can arise in free-market economies. By controlling the means of production, the government can redistribute wealth and ensure access to essential goods and services for all citizens, regardless of their ability to pay.

However, planned economies have their challenges. The lack of price signals and competition can lead to inefficiencies, limited choice, and shortages of goods and services. The central planning authorities may not accurately anticipate consumer demand, resulting in overproduction of certain goods and shortages of others. The lack of incentives for producers to innovate can also lead to stagnation and lower overall productivity.

While market and planned economies represent two extreme ends of the economic spectrum, most countries operate under mixed economies. These are systems that combine elements of both market and planned approaches. The specific balance between market forces and government intervention varies from country to country.

For example, countries like the United States and New Zealand have market economies with limited government intervention, while countries like Sweden and Norway have mixed economies with a more significant role for the government in areas such as healthcare and social welfare.

The defining method of managing an economy, whether market or planned, has a significant impact on a country’s economic growth, prosperity, and overall well-being. It’s important to recognize the strengths and weaknesses of both approaches when considering which system is most suitable for a particular country or situation.

🔔 Lessons from Market Economy Success Stories

A market economy is an economic system in which decisions regarding production, distribution, and consumption of goods and services are guided by the forces of supply and demand in free and competitive markets.

There are several success stories of market economies around the world that provide valuable lessons for other nations. These success stories demonstrate the benefits of a market economy in promoting economic growth, innovation, and efficiency. Here are some key lessons we can learn from these success stories:

1. The role of competition

In a market economy, competition is a driving force that leads to better products, lower prices, and increased efficiency. Successful market economies emphasize competition and create a level playing field for businesses to compete. This encourages innovation and ensures that resources are allocated efficiently.

2. The importance of property rights

Property rights are crucial for a market economy to function effectively. It provides individuals and businesses with the incentive to invest, innovate, and create wealth. Ensuring strong and enforceable property rights creates a sense of security and encourages long-term investment and economic growth.

3. The role of prices

Prices play a crucial role in a market economy. They provide information about the scarcity of goods and services and help allocate resources efficiently. In a market economy, prices are determined by the interaction of supply and demand. This price mechanism guides consumers and producers in making economic decisions.

4. The power of consumer sovereignty

In a market economy, consumers have the power to choose what they want to consume. This drives producers to satisfy consumer demands and ensures that resources are used efficiently. Consumer sovereignty is a key characteristic of market economies and is essential for economic growth and prosperity.

5. The benefits of free trade

Market economies thrive on free trade. Allowing the free flow of goods and services across borders encourages specialization, increases competition, and expands consumer choice. Successful market economies have embraced free trade and have seen the benefits of connecting with the global marketplace.

6. The role of entrepreneurship

Entrepreneurship is a driving force in market economies. Entrepreneurs identify opportunities, take risks, and create new businesses and jobs. Market economies provide an environment that fosters entrepreneurship and rewards innovation. Supporting entrepreneurship is essential for economic growth and prosperity.

In conclusion, the success stories of market economies demonstrate the effectiveness of free-market systems in creating wealth, promoting innovation, and improving living standards. By embracing competition, ensuring property rights, relying on prices, empowering consumers, embracing free trade, and supporting entrepreneurship, nations can achieve economic success and prosperity.

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Solving Case Study in Economics: A Complete Guide

case study in economics

Case studies are invaluable in economics education, providing students with real-world scenarios to apply theoretical concepts and analytical skills. However, solving a case study in economics requires a structured approach that combines research, critical thinking, and a deep understanding of economic principles. This post presents a comprehensive guide on effectively solving a case study in economics , ensuring a thorough analysis and a grasp of practical implications.

Understanding the Case Study

Read carefully: .

Begin by reading the case study thoroughly. Pay attention to the details, context, and objectives presented. Identify the main issues, stakeholders, and the economic concepts at play.

Define the Problem: 

Clearly define the economic problem or challenge presented in the case study. What are the fundamental problems that ought to be handled? Understanding the problem is crucial before proceeding with analysis.Identify the central economic problem or challenge that the case study presents. This could involve issues related to demand and supply, market structures, externalities, government interventions, or any other economic concept.

Gathering Relevant Information

Research: .

Conduct thorough research to gather additional information relevant to the case study. This may involve exploring economic theories, statistical data, and industry trends. Reliable sources such as academic journals, government reports, and reputable news outlets are valuable.

Identify Variables: 

Identify the variables affecting the situation presented in the case study. These could include economic indicators, market conditions, government policies, etc.

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Applying Economic Concepts

Use relevant theories: .

Apply relevant economic theories and concepts to analyze the case study. Consider concepts like supply and demand, elasticity, market structure, cost analysis, and utility theory, depending on the case context.

Quantitative Analysis:  

If applicable, use quantitative methods such as calculations, graphs, and charts to illustrate your analysis. These tools can help visualize economic relationships and trends.

Data Interpretation

Cause and effect:.

 Identify the cause-and-effect relationships driving the economic situation in the case study. Analyze how changes in one variable can impact others and lead to specific outcomes.

Consider Alternatives: 

Explore solutions or strategies to address the issues presented. Consider the possible benefits and drawbacks of each option.

Making Recommendations

Informed decisions: .

Based on your analysis, make informed recommendations for addressing the challenges outlined in the case study in economics. Your recommendations should be rooted in economic theories and supported by your gathered data.

Justify Your Recommendations: 

Clearly explain the rationale behind your recommendations. How will they positively impact the stakeholders involved? Justify your choices with economic logic.

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Tips for Success

Practice: .

The more case studies you solve, the more comfortable you’ll become with the process. Practice hones your analytical skills and enables you to apply economic concepts effectively.

Collaborate: 

Engage in discussions with peers or instructors. Collaborative analysis can offer diverse perspectives and deepen your understanding of the case.

Real-World Context: 

Relate the case study to real-world economic scenarios. Understanding the practical implications of your analysis adds depth to your recommendations.

Stay Updated:

 Case study in economics is a dynamic field. Stay updated with current economic trends, policy changes, and market developments to enhance the relevance of your analysis.

Read the Case Thoroughly

Begin by reading the case study attentively. Familiarize yourself with the context, characters, and economic issues presented. Take notes as you read to highlight key information and identify the main problems.

 Apply Relevant Economic Concepts

Next, apply the economic concepts and theories you’ve learned in your coursework to the identified problem. Consider how concepts like elasticity, opportunity cost, marginal analysis, and cost-benefit analysis can be applied to the situation.

 Collect Data and Information

Gather relevant data and information that can support your analysis. This may include statistical data, market trends, historical information, and other relevant sources that substantiate your arguments.

Analyze and Evaluate

Conduct a thorough analysis of the situation. Identify the factors contributing to the problem and evaluate their impact. Use graphs, charts, and diagrams to represent your analysis and provide clarity visually.

 Explore Alternatives

Generate possible solutions or alternatives to address the identified problem. Consider the pros and cons of each solution, keeping in mind economic feasibility, ethical implications, and potential outcomes.

 Apply Economic Theories

When formulating solutions, apply economic theories and principles that align with the situation. For instance, if you’re dealing with a market failure, explore how government intervention or corrective measures can be applied based on economic theories like externalities or public goods.

Quantitative Analysis

If applicable, perform quantitative analysis using relevant mathematical or statistical tools. This could involve calculating elasticity break-even points or analyzing cost structures to support your recommendations.

 Justify Your Recommendations

Ensure that your solutions are well-justified and backed by solid economic reasoning. Explain how each solution addresses the problem and aligns with economic theories.

 Consider Real-World Constraints

Acknowledge any real-world constraints that might affect the implementation of your recommendations. This could include budgetary limitations, political considerations, or social factors.

Solving an case study in economics writing is an enriching experience that bridges theory and practice. It requires a structured approach, from understanding the case to making well-informed recommendations. By thoroughly analyzing the economic concepts, interpreting data, and applying relevant theories, you can arrive at strategic solutions that align with economic principles.

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The Role of Government in Market Economies

Course Number 1195

Course Overview and Objectives

This course is about one question: What is the proper role of the government in the market economy? We study the role of government as it plays out in the real world, using vivid case studies from many countries, decades, and policy angles. At the same time, we align these cases with a rigorous theoretical framework that clarifies the circumstances under which government intervention in the market can improve outcomes.

The goal of this course is to deepen your insight into and influence on the debate over economic policy. Private-sector managers are better able to position their organizations, both defensively and offensively, if they understand why and how governments act. Moreover, exceptional private-sector leaders are now widely expected to provide informed, intelligent leadership on the policy issues at the heart of this course.

Career Focus

The course is designed for students who aim to lead private-sector institutions of systemic importance, influence public debates over government policy, or occupy policymaking positions at some point in their careers. The skills and knowledge it develops, however, are increasingly valuable to the broad range of businesses, non-profit organizations, and civil society institutions whose activities intersect with government policy.

Course Structure

The course opens with a case on why a hypothetical competitive market economy can be used as a starting point for analyzing what role government should play. Market economies are miraculous when at their best: flexible, decisive, and self-correcting.

But markets are not always at their best, and the first module of the course confronts major real-world departures from this hypothetical starting point. These departures mean that government policy can improve the efficiency of the economy, in principle making all individuals better off. Policy areas addressed here include antitrust regulation, environmental protection, education, health care, and fiscal and monetary policy.

We may want the government to do more than remove inefficiencies, so the second module tackles questions of economic justice and their implications for the government's role. In particular, in this module we study central debates over the taxation of individuals and firms, the provision of economic assistance, and the determination of the boundaries of policy.

As this summary shows, the cases we discuss take us step-by-step through a rigorous conceptual framework that provides the intellectual backbone for the course. At the same time, each case gives us a chance to examine an important policy area in some depth. Accompanying each case are a set of core concepts and suggested readings. The core concepts represent fundamental insights into the role of government, so an understanding of them can substantially increase one's ability to analyze a given policy decision. The suggested supplemental readings are starting points for pursuing areas of particular interest in greater detail. They include many foundational pieces of scholarship, as well as newer and less scholarly works that shed light on these issues.

Course Administration

Course grades will be based on class participation (50%) and a short paper (50%). For the paper, students will apply the tools and ideas from the course to prepare, with one or two partners if they wish, an analysis of a government policy problem of their choice. The course is designed so that the time required to prepare the paper is comparable to the time a student would devote to a final exam. Throughout the term, Professor Weinzierl will be available to meet with students by appointment. To arrange a meeting, please contact his assistant, Deannah Blemur, at [email protected] .

Copyright © 2022 President & Fellows of Harvard College. All Rights Reserved.

• Research & Outlook

Commodity Markets: Evolution, Challenges, and Policies

Commodity markets are integral to the global economy. Understanding what drives developments of these markets is critical to the design of policy frameworks that facilitate the economic objectives of sustainable growth, inflation stability, poverty reduction, food security, and the mitigation of climate change. This study is the first comprehensive analysis examining market and policy developments for all commodity groups, including energy, metals, and agriculture, over the past century. It finds that, while the quantity of commodities consumed has risen enormously, driven by population and income growth, the relative importance of commodities has shifted over time, as technological innovation created new uses for some materials and facilitated substitution among commodities. The study also shows that commodity markets are heterogeneous in terms of their drivers, price behavior, and macroeconomic impact on emerging markets and developing economies, and that the relationship between economic growth and commodity demand varies widely across countries, depending on their stage of economic development. Policy frameworks that enable countercyclical macroeconomic responses have become increasingly common—and beneficial. Other policy tools have had mixed outcomes.

PRAISE FOR THE BOOK

"Discussions in commodity-exporting emerging markets are often based on ideas with little empirical and analytical support. This book, based on vigorous research, is a great contribution to improve our understanding of these economies. It provides robust empirical evidence including a long-term perspective on commodity prices. It also contains very thoughtful policy analysis, with implications for resilience, macroeconomic policies, and development strategies. It will be a key reference for scholars as well as policy makers."

 -- José De Gregorio, Dean of the School of Economic and Business, Universidad de Chile, Former Minister of Economy, Mining and Energy, and Governor of the Central Bank of Chile

" Commodity Markets: Evolution Challenges and Policies is a broad-ranging analysis of just about everything you have ever wanted to know about commodity markets. It has a broad sweep of commodity prices and production (primarily energy, metals, and agricultural commodities) over the past century, carefully documenting and rigorously analyzing the important difference in experiences across different groups of commodities. It is comprehensive in its historical coverage but also addresses contemporary issues such as an insightful analysis of the impact of the COVID19 pandemic and the Ukraine war on commodity prices. It draws out the impact of shocks, technology, and policy as drivers of demand and supply for a range of different commodities. This book is essential reading for anyone interested in the drivers of commodity prices and production over the last century and the implications for future trends."

 -- Warwick McKibbin,  Distinguished Professor of Economics and Public Policy, Director of the Centre for Applied Macroeconomic Analysis, Director of Policy Engagement at the Australian Research Centre of Excellence in Population Ageing Research, Australian National University

"A sound understanding of commodity markets is more essential than ever in light of the Covid-19 pandemic, the war in Ukraine, and the transition from fossil fuels to renewable energy commodities. This volume offers an excellent, comprehensive, and timely analysis of the wide range of factors that affect commodity markets. It carefully surveys historical and likely future trends in commodity supply, demand, and prices, and offers detailed policy proposals to avoid the havoc that turbulent commodity markets can cause on the economies of commodity exporters and importers."

 -- Rick Van der Ploeg, Research Director of Oxford Centre for Analysis of Resource Rich Economies, University of Oxford

"Commodity prices tend to be seen as an aggregate, especially when they periodically move upward together. While these aggregate movements are important, this excellent and well-researched volume emphasizes the heterogeneity of commodity markets and the differing economic forces that act upon them. Heterogeneity calls for differentiated and tailored policy tools that take into account the specificities of markets, a message that analysts and policy makers would do well to heed."

 -- Ravi Kanbur, T.H. Lee Professor of World Affairs, International Professor of Applied Economics and Management, Cornell University

"Commodity markets are complex and constantly evolving. This insightful and well-structured study of all the ins and outs of commodity markets is a valuable addition to the literature for understanding how these markets function and their impacts on the global economy. As the war in Ukraine and the COVID-19 pandemic continue to have substantial impacts on commodity prices and supply chains, this incredibly timely study offers analysts and policy makers a firm foundation for making better predictions and developing more effective policy responses."

 -- Abdolreza Abbassian, Former FAO Senior Economist, and G20-AMIS Secretary

"I wish I had this book earlier in my career!  Commodity Markets: Evolution, Challenges, and Policies provides an insightful analysis of the dynamics of commodity markets and their implications on the broader economy. A must-read for anyone interested in commodity markets. "

 -- Xiaoli Etienne, Associate Professor and Idaho Wheat Commission Endowed Chair in Commodity Risk Management,  University of Idaho

"While many African countries were spared the ravages of the Covid-19 pandemic, their economies suffered because commodity prices collapsed. Since then, the war in Ukraine has affected developing countries thousands of miles away because the price of oil, gas, and food have spiked. Commodity markets not only receive the impact of global shocks, but they transmit them to commodity-dependent countries around the world. This book lucidly explains how these shocks affect commodity markets and, in turn, how fluctuations in these markets affect developing economies. As the world deals with climate change and the energy transition, these findings will become even more important."

-- Shanta Devarajan, Professor of the Practice of International Development, Georgetown University

"This book brings into one place otherwise scattered information on the evolution of commodity markets, causes and impacts of price shocks, and the drivers and implications of commodity demand. These are issues of great importance to policy makers, particularly in commodity-dependent developing countries. Three major events that have recently affected commodity markets, namely, the energy transition, the COVID-19 pandemic, and the war in Ukraine, highlight the vulnerability of commodity-dependent countries to price shocks. This book should be a source of inspiration for these countries as they attempt to move away from the commodity dependence trap that has afflicted them for so long. I strongly recommend this book to colleagues working on the topic."

-- Janvier Nkurunziza, Officer in Charge, Commodities Branch, United Nations Conference on Trade and Development

" Commodity Markets: Evolution, Challenges, and Policies  will provide the J.P. Morgan Center for Commodities with the comprehensive textbook we have always wanted to write. Currently, the vast majority of commodity-related textbooks are dominated by trading issues, with a limited focus on market fundamentals. As a result, our instructors typically rely on a wide mix of articles, book chapters, and case studies for their respective courses. By providing a comprehensive detailed coverage of these issues, this book fills a major gap in the literature."

 -- Tom Brady, Executive Director, J.P. Morgan Center for Commodities, University of Colorado Denver

OTHER BOOKS ON THE GLOBAL ECONOMY

Falling Long-Term Growth Prospects: Trends, Expectations, and Policies (March 2023)

The Long Shadow of Informality: Challenges and Policies  (May 2021)

Global Productivity: Trends, Drivers, and Policies  (July 2020)

Global Waves of Debt: Causes and Consequences  (December 2019)

A Decade After the Global Recession  (November 2019)

Inflation in Emerging and Developing Economies  (November 2018)

• Key Downloads Full report | Foreword | Summary
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• Presentation East Asia Outreach (PDF)

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Note that the Economics 103 Case Studies are meant to supplement the course material by giving you experience applying Economic concepts to real world examples. While they are beyond the level you will be tested on, they are useful for students who want a stronger grasp of the concepts and their applications.

Note that this case study is difficult if you do not print the diagrams, or reproduce them on graph paper. If you are unable to print, we recommend reviewing the solutions to ensure you understand the general lessons presented.

In 2016 rental vacancy rates dropped to as low as 0.6% in Greater Victoria. When compared to the national average of 3.3% it is clear why many media channels and individuals were calling it a ‘housing crisis’. Students were especially hit hard by these low vacancies, with some international students at Camoson college having to return home when they couldn’t find a place to stay. Using our competitive market model, let’s examine some of the factors that played into this crisis and policies that could be used to fix it.

Read more about the Victoria Housing crisis.

Below is a representation of the Victoria Housing Market.

1. Label Figure CS3 a. with the Equilibrium price and quantity, and label supply and demand curves as either renters or landlords.

If supply is equal to demand there should be no vacancy, but we know that a 0% vacancy rate would be an extremely difficult market for renters.

2. Explain why a housing market at equilibrium could still have a vacancy rate of 4%.

One factor that has been blamed for the housing crisis is Airbnb. Airbnb describes itself as  an online marketplace and hospitality service, enabling people to list or rent short-term lodging including vacation rentals, apartment rentals, homestays, hostel beds, or hotel rooms, with the cost of lodging set by the property owner. City councillors have targeted these short term rentals, saying that many landlords have opted to Airbnb their home, rather than rent out longer term. The growth of Airbnb in Vancouver has been shown below.

3. Assume 3000 landlords decide to switch from renting to Airbnb, show the impact of the changes on Figure CS3 b. Label the new equilibrium price and quantity.

Note that Airbnb has been adamant that short-term rentals have had a neglible impact on the housing market, citing that in Vancouver only 320 hosts rent out thier properties often enough to make more money that long term rentals. That represents only 0.11% of the total housing units. In Victoria, that would mean only 25 units are affected by short-term rentals.

Tom Davidoff , a  University of B.C. business professor, said t he general public frequently looks at the fact that Airbnb is popular in expensive neighbourhoods and concludes that it is Airbnb that drives up rents there. But, he said, those neighbourhoods were expensive anyway and the impact of Airbnb taking a certain slice of the available stock is minimal.

Read more about Airbnb’s supposed impact on the market.

Another factor that has had an impact on the rental market is the inability of many young Canadians to buy homes. Not only have house prices skyrocketed, but more are burdened by student loans out of university. It is estimated that it takes 3 times longer (15 years) to save enough to have a 20% downpayment on a house than it did in 1976. This reduction in Canadians mortgaging a home has caused an increasing amount to enter the market.

Read more about the increasing squeeze on millennials.

4. Assume 9000 new renters enter the market instead of mortgaging homes, show the impact of the changes on Figure CS3 b.  Explain the impact of both the shock from Airbnb and the shock from less housing buyers on equilibrium price and quantity. Do the shocks work together or oppose one another?

In the housing market, prices are slow to adjust, landlords cannot simply raise prices immediately under the Residential Tenancy Act. Landlords can only raise prices when negotiating a new contract. This causes many unjustified evictions from landlords as they want to charge the new equilibrium price. In the short-term, prices stay relatively the same causing shortages or surplus.

5. Assume price remains at the original equilibrium , calculate the magnitude of the shortage or surplus of housing that results. Explain the impact this shortage will have the behaviour of landlords.

The British Columbia government unveiled a $500-million affordable-housing plan targeted at communities that have struggled with a shortage of low-cost housing.  Premier Christy Clark announced her government’s commitment to fund 68 new projects to help address the crisis

Read more about the governments response to the housing crisis.

6. Assume the government wants to bring price back to it’s original level, if it costs $50,000 to increase the number of rental units by one, how much will this cost the government?

Groups have criticized the government response, saying that they have ignored many other avenues that could more easily increase the supply of affordable housing.

7. Read the Executive Summary of the Alliance of BC Students White Paper on Student Housing.

What is the ABCS proposing that could help decrease price in the market? How would this affect supply and/or demand?

In this case study we have shown how microeconomic concepts of supply and demand can be used to understand current events in the news. Do you have a story you think would make a good case study? Contact [email protected] to propose your story.

Principles of Microeconomics Copyright © 2017 by University of Victoria is licensed under a Creative Commons Attribution 4.0 International License , except where otherwise noted.

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Economic Perspectives on Government pp 17–45 Cite as

Markets, Market Failure and the Role of Government

• Keith Dowding 5 &
• Brad R. Taylor 6  
• First Online: 10 July 2019

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Part of the book series: Foundations of Government and Public Administration ((FGPA))

This chapter introduces Pareto efficiency as the key normative concept of welfare economics and describes the conditions under which we expect efficiency or market failure. We pay particular attention to the existence of externalities and show how these can, but do not always, cause markets to fail. Whenever there is market failure it is conceptually possible for government to intervene in order to improve outcomes. Government failure also occurs, however, and so such intervention is not always practical. When considering imperfect alternatives, we must engage in comparative institutional analysis.

• Pareto efficiency
• Market competition
• Market failure
• Externalities
• Government failure
• Coase theorem
• Asymmetric information

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In the standard analysis, the tax is levied on the production of the good itself. As Plott ( 1966 ) points out, the tax should instead be levied on the output of the externality (i.e. the pollution) or on the resource which causes the pollution. This provides the right incentives for firms to change their production process to remove externalities rather than simply reducing production. Since it does not alter the central points we wish to make in this chapter, we will use the simpler case of taxes imposed on the output of a good.

Inframarginal externalities can in some cases be inefficient in the sense that net benefits would be increased by moving from equilibrium to a much smaller or greater level of output, even though marginal changes would cause inefficiency (Buchanan and Stubblebine 1962 : 374).

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6.3 Market Failure

Learning objectives.

• Explain what is meant by market failure and the conditions that may lead to it.
• Distinguish between private goods and public goods and relate them to the free rider problem and the role of government.
• Explain the concepts of external costs and benefits and the role of government intervention when they are present.
• Explain why a common property resource is unlikely to be allocated efficiently in the marketplace.

Private decisions in the marketplace may not be consistent with the maximization of the net benefit of a particular activity. The failure of private decisions in the marketplace to achieve an efficient allocation of scarce resources is called market failure . Markets will not generate an efficient allocation of resources if they are not competitive or if property rights are not well defined and fully transferable. Either condition will mean that decision makers are not faced with the marginal benefits and costs of their choices.

Think about the drive that we had you take at the beginning of this chapter. You faced some, but not all, of the opportunity costs involved in that choice. In particular, your choice to go for a drive would increase air pollution and might increase traffic congestion. That means that, in weighing the marginal benefits and marginal costs of going for a drive, not all of the costs would be counted. As a result, the net benefit of the allocation of resources such as the air might not be maximized.

Noncompetitive Markets

The model of demand and supply assumes that markets are competitive. No one in these markets has any power over the equilibrium price; each consumer and producer takes the market price as given and responds to it. Under such conditions, price is determined by the intersection of demand and supply.

In some markets, however, individual buyers or sellers are powerful enough to influence the market price. In subsequent chapters, we will study cases in which producers or consumers are in a position to affect the prices they charge or must pay, respectively. We shall find that when individual firms or groups of firms have market power, which is the ability to change the market price, the price will be distorted—it will not equal marginal cost.

Public Goods

Some goods are unlikely to be produced and exchanged in a market because of special characteristics of the goods themselves. The benefits of these goods are such that exclusion is not feasible. Once they are produced, anyone can enjoy them; there is no practical way to exclude people who have not paid for them from consuming them. Furthermore, the marginal cost of adding one more consumer is zero. A good for which the cost of exclusion is prohibitive and for which the marginal cost of an additional user is zero is a public good . A good for which exclusion is possible and for which the marginal cost of another user is positive is a private good .

National defense is a public good. Once defense is provided, it is not possible to exclude people who have not paid for it from its consumption. Further, the cost of an additional user is zero—an army does not cost any more if there is one more person to be protected. Other examples of public goods include law enforcement, fire protection, and efforts to preserve species threatened with extinction.

Free Riders

Suppose a private firm, Terror Alert, Inc., develops a completely reliable system to identify and intercept 98% of any would-be terrorists that might attempt to enter the United States from anywhere in the world. This service is a public good. Once it is provided, no one can be excluded from the system’s protection on grounds that he or she has not paid for it, and the cost of adding one more person to the group protected is zero. Suppose that the system, by eliminating a potential threat to U.S. security, makes the average person in the United States better off; the benefit to each household from the added security is worth $40 per month (about the same as an earthquake insurance premium). There are roughly 113 million households in the United States, so the total benefit of the system is $4.5 billion per month. Assume that it will cost Terror Alert, Inc., $1 billion per month to operate. The benefits of the system far outweigh the cost.

Suppose that Terror Alert installs its system and sends a bill to each household for $20 for the first month of service—an amount equal to half of each household’s benefit. If each household pays its bill, Terror Alert will enjoy a tidy profit; it will receive revenues of more than $2.25 billion per month.

But will each household pay? Once the system is in place, each household would recognize that it will benefit from the security provided by Terror Alert whether it pays its bill or not. Although some households will voluntarily pay their bills, it seems unlikely that very many will. Recognizing the opportunity to consume the good without paying for it, most would be free riders. Free riders are people or firms that consume a public good without paying for it. Even though the total benefit of the system is $4.5 billion, Terror Alert will not be faced by the marketplace with a signal that suggests that the system is worthwhile. It is unlikely that it will recover its cost of $1 billion per month. Terror Alert is not likely to get off the ground.

The bill for $20 from Terror Alert sends the wrong signal, too. An efficient market requires a price equal to marginal cost. But the marginal cost of protecting one more household is zero; adding one more household adds nothing to the cost of the system. A household that decides not to pay Terror Alert anything for its service is paying a price equal to its marginal cost. But doing that, being a free rider, is precisely what prevents Terror Alert from operating.

Because no household can be excluded and because the cost of an extra household is zero, the efficiency condition will not be met in a private market. What is true of Terror Alert, Inc., is true of public goods in general: they simply do not lend themselves to private market provision.

Public Goods and the Government

Because many individuals who benefit from public goods will not pay for them, private firms will produce a smaller quantity of public goods than is efficient, if they produce them at all. In such cases, it may be desirable for government agencies to step in. Government can supply a greater quantity of the good by direct provision, by purchasing the public good from a private agency, or by subsidizing consumption. In any case, the cost is financed through taxation and thus avoids the free-rider problem.

Most public goods are provided directly by government agencies. Governments produce national defense and law enforcement, for example. Private firms under contract with government agencies produce some public goods. Park maintenance and fire services are public goods that are sometimes produced by private firms. In other cases, the government promotes the private consumption or production of public goods by subsidizing them. Private charitable contributions often support activities that are public goods; federal and state governments subsidize these by allowing taxpayers to reduce their tax payments by a fraction of the amount they contribute.

Figure 6.15 Public Goods and Market Failure

Because free riders will prevent firms from being able to require consumers to pay for the benefits received from consuming a public good, output will be less than the efficient level. In the case shown here, private donations achieved a level of the public good of Q 1 per period. The efficient level is Q *. The deadweight loss is shown by the triangle ABC.

While the market will produce some level of public goods in the absence of government intervention, we do not expect that it will produce the quantity that maximizes net benefit. Figure 6.15 “Public Goods and Market Failure” illustrates the problem. Suppose that provision of a public good such as national defense is left entirely to private firms. It is likely that some defense services would be produced; suppose that equals Q 1 units per period. This level of national defense might be achieved through individual contributions. But it is very unlikely that contributions would achieve the correct level of defense services. The efficient quantity occurs where the demand, or marginal benefit, curve intersects the marginal cost curve, at Q *. The deadweight loss is the shaded area ABC; we can think of this as the net benefit of government intervention to increase the production of national defense from Q 1 up to the efficient quantity, Q *.

Note that the definitions of public and private goods are based on characteristics of the goods themselves, not on whether they are provided by the public or the private sector. Postal services are a private good provided by the public sector. The fact that these goods are produced by a government agency does not make them a public good.

External Costs and Benefits

Suppose that in the course of production, the firms in a particular industry generate air pollution. These firms thus impose costs on others, but they do so outside the context of any market exchange—no agreement has been made between the firms and the people affected by the pollution. The firms thus will not be faced with the costs of their action. A cost imposed on others outside of any market exchange is an external cost .

We saw an example of an external cost in our imaginary decision to go for a drive. Here is another: violence on television, in the movies, and in video games. Many critics argue that the violence that pervades these media fosters greater violence in the real world. By the time a child who spends the average amount of time watching television finishes elementary school, he or she will have seen 100,000 acts of violence, including 8,000 murders, according to the American Psychological Association. Thousands of studies of the relationship between violence in the media and behavior have concluded that there is a link between watching violence and violent behaviors. Video games are a major element of the problem, as young children now spend hours each week playing them. Fifty percent of fourth-grade graders say that their favorite video games are the “first person shooter” type 1 .

Any tendency of increased violence resulting from increased violence in the media constitutes an external cost of such media. The American Academy of Pediatrics reported in 2001 that homicides were the fourth leading cause of death among children between the ages of 10 and 14 and the second leading cause of death for people aged 15 to 24 and has recommended a reduction in exposure to media violence (Rosenberg, M., 2003). It seems reasonable to assume that at least some of these acts of violence can be considered an external cost of violence in the media.

An action taken by a person or firm can also create benefits for others, again in the absence of any market agreement; such a benefit is called an external benefit . A firm that builds a beautiful building generates benefits to everyone who admires it; such benefits are external.

External Costs and Efficiency

Figure 6.16 External Costs

When firms in an industry generate external costs, the supply curve S 1 reflects only their private marginal costs, MC P . Forcing firms to pay the external costs they impose shifts the supply curve to S 2 , which reflects the full marginal cost of the firms’ production, MC e . Output is reduced and price goes up. The deadweight loss that occurs when firms are not faced with the full costs of their decisions is shown by the shaded area in the graph.

The case of the polluting firms is illustrated in Figure 6.16 “External Costs” . The industry supply curve S 1 reflects private marginal costs, MC p . The market price is P p for a quantity Q p . This is the solution that would occur if firms generating external costs were not forced to pay those costs. If the external costs generated by the pollution were added, the new supply curve S 2 would reflect higher marginal costs, MC e . Faced with those costs, the market would generate a lower equilibrium quantity, Q e . That quantity would command a higher price, P e . The failure to confront producers with the cost of their pollution means that consumers do not pay the full cost of the good they are purchasing. The level of output and the level of pollution are therefore higher than would be economically efficient. If a way could be found to confront producers with the full cost of their choices, then consumers would be faced with a higher cost as well. Figure 6.16 “External Costs” shows that consumption would be reduced to the efficient level, Q e , at which demand and the full marginal cost curve ( MC e ) intersect. The deadweight loss generated by allowing the external cost to be generated with an output of Q p is given as the shaded region in the graph.

External Costs and Government Intervention

If an activity generates external costs, the decision makers generating the activity will not be faced with its full costs. Agents who impose these costs will carry out their activities beyond the efficient level; those who consume them, facing too low a price, will consume too much. As a result, producers and consumers will carry out an excessive quantity of the activity. In such cases, government may try to intervene to reduce the level of the activity toward the efficient quantity. In the case shown in Figure 6.16 “External Costs” , for example, firms generating an external cost have a supply curve S 1 that reflects their private marginal costs, MC p . A per-unit pollution fee imposed on the firms would increase their marginal costs to MC e , thus shifting the supply curve to S 2 , and the efficient level of production would emerge. Taxes or other restrictions may be imposed on the activity that generates the external cost in an effort to confront decision makers with the costs that they are imposing. In many areas, firms and consumers that pollute rivers and lakes are required to pay fees based on the amount they pollute. Firms in many areas are required to purchase permits in order to pollute the air; the requirement that permits be purchased serves to confront the firms with the costs of their choices.

Another approach to dealing with problems of external costs is direct regulation. For example, a firm may be ordered to reduce its pollution. A person who turns his or her front yard into a garbage dump may be ordered to clean it up. Participants at a raucous party may be told to be quiet. Alternative ways of dealing with external costs are discussed later in the text.

Common Property Resources

Common property resources are resources for which no property rights have been defined. The difficulty with common property resources is that individuals may not have adequate incentives to engage in efforts to preserve or protect them. Consider, for example, the relative fates of cattle and buffalo in the United States in the nineteenth century. Cattle populations increased throughout the century, while the buffalo nearly became extinct. The chief difference between the two animals was that exclusive property rights existed for cattle but not for buffalo.

Owners of cattle had an incentive to maintain herd sizes. A cattle owner who slaughtered all of his or her cattle without providing for replacement of the herd would not have a source of future income. Cattle owners not only maintained their herds but also engaged in extensive efforts to breed high-quality livestock. They invested time and effort in the efficient management of the resource on which their livelihoods depended.

Buffalo hunters surely had similar concerns about the maintenance of buffalo herds, but they had no individual stake in doing anything about them—the animals were a common property resource. Thousands of individuals hunted buffalo for a living. Anyone who cut back on hunting in order to help to preserve the herd would lose income—and face the likelihood that other hunters would go on hunting at the same rate as before.

Today, exclusive rights to buffalo have been widely established. The demand for buffalo meat, which is lower in fat than beef, has been increasing, but the number of buffalo in the United States is rising rapidly. If buffalo were still a common property resource, that increased demand, in the absence of other restrictions on hunting of the animals, would surely result in the elimination of the animal. Because there are exclusive, transferable property rights in buffalo and because a competitive market brings buyers and sellers of buffalo and buffalo products together, we can be reasonably confident in the efficient management of the animal.

When a species is threatened with extinction, it is likely that no one has exclusive property rights to it. Whales, condors, grizzly bears, elephants in Central Africa—whatever the animal that is threatened—are common property resources. In such cases a government agency may impose limits on the killing of the animal or destruction of its habitat. Such limits can prevent the excessive private use of a common property resource. Alternatively, as was done in the case of the buffalo, private rights can be established, giving resource owners the task of preservation.

Key Takeaways

• Public sector intervention to increase the level of provision of public goods may improve the efficiency of resource allocation by overcoming the problem of free riders.
• Activities that generate external costs are likely to be carried out at levels that exceed those that would be efficient; the public sector may seek to intervene to confront decision makers with the full costs of their choices.
• Some private activities generate external benefits.
• A common property resource is unlikely to be allocated efficiently in the marketplace.

The manufacture of memory chips for computers generates pollutants that generally enter rivers and streams. Use the model of demand and supply to show the equilibrium price and output of chips. Assuming chip manufacturers do not have to pay the costs these pollutants impose, what can you say about the efficiency of the quantity of chips produced? Show the area of deadweight loss imposed by this external cost. Show how a requirement that firms pay these costs as they produce the chips would affect the equilibrium price and output of chips. Would such a requirement help to satisfy the efficiency condition? Explain.

Case in Point: Externalities and Smoking

Figure 6.17

Russellstreet – Smoker – CC BY-SA 2.0.

Smokers impose tremendous costs on themselves. Based solely on the degree to which smoking shortens their life expectancy, which is by about six years, the cost per pack is $35.64. That cost, of course, is a private cost. In addition to that private cost, smokers impose costs on others. Those external costs come in three ways. First, they increase health-care costs and thus increase health insurance premiums. Second, smoking causes fires that destroy more than $300 million worth of property each year. Third, more than 2,000 people die each year as a result of “secondhand” smoke. A 1989 study by the RAND Corporation estimated these costs at $0.53 per pack.

In an important way, however, smokers also generate external benefits. They contribute to retirement programs and to Social Security, then die sooner than nonsmokers. They thus subsidize the retirement programs of the rest of the population. According to the RAND study, that produces an external benefit of $0.24 per pack, leaving a net external cost of $0.29 per pack. Given that state and federal excise taxes averaged $0.37 in 1989, the RAND researchers concluded that smokers more than paid their own way.

Economists Jonathan Gruber of the Massachusetts Institute of Technology and Botond Koszegi of the University of California at Berkeley have suggested that, in the case of people who consume “addictive bads” such as cigarettes, an excise tax on cigarettes of as much as $4.76 per pack may improve the welfare of smokers.

They base their argument on the concept of “time inconsistency,” which is the theory that smokers seek the immediate gratification of a cigarette and then regret their decision later. Professors Gruber and Koszegi argue that higher taxes would serve to reduce the quantity of cigarettes demanded and thus reduce behavior that smokers would otherwise regret. Their argument is that smokers impose “internalities” on themselves and that higher taxes would reduce this.

Where does this lead us? If smokers are “rationally addicted” to smoking, i.e., they have weighed the benefits and costs of smoking and have chosen to smoke, then the only problem for public policy is to assure that smokers are confronted with the external costs they impose. In that case, the problem is solved: through excise taxes, smokers more than pay their own way. But, if the decision to smoke is an irrational one, it may be improved through higher excise taxes on smoking.

Sources: Jonathan Gruber and Botond Koszegi, “A Theory of Government Regulation of Addictive Bads: Optimal Tax Levels and Tax Incidence for Cigarette Excise Taxation,” NBER Working Paper 8777, February 2002; Willard G. Manning et al., “The Taxes of Sin: Do Smokers and Drinkers Pay Their Way?” Journal of the American Medical Association , 261 (March 17, 1989): 1604–1609.

Answer to Try It! Problem

Figure 6.18

In the absence of any regulation, chip producers are not faced with the costs of the pollution their operations generate. The market price is thus P 1 and the quantity Q 1 . The efficiency condition is not met; the price is lower and the quantity greater than would be efficient. If producers were forced to face the cost of their pollution as well as other production costs, the supply curve would shift to S 2 , the price would rise to P 2 , and the quantity would fall to Q 2 . The new solution satisfies the efficiency condition.

1 See Report of the Committee on Commerce, Science, and Transportation, Children’s Protection From Violent Programming Act , Senate Report 106–509 (October 26, 2000), Washington, D.C.: U.S. Government Printing Office, 2000, and Michael Rich, “Violent Video Games Testimony,” Chicago City Council, October 30, 2000, at http://www.aap.org/advocacy/rich-videogameviolence.pdf .

2 Common property resources are sometimes referred to as open access resources.

Rosenberg, M., “Successful State Strategies,” Adolescent Health Leadership Forum, December 6, 2003, at http://www.aap.org/advocacy/ahproject/AHLSuccessful StateStrategiesMRosenberg.pps .

Principles of Economics Copyright © 2016 by University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

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The proper role of government in the market economy: The case of the post-COVID recovery

The long-lasting, widespread COVID-19 pandemic has imposed huge challenges on public health as well as economic recovery. Governments must take an active role in designing and enforcing economic policies to address various problems that pure market forces cannot, such as externalities and the absence of risk markets. Covid-19 has exposed deficiencies in current arrangements and the need to develop better institutions. We also need to develop better understandings of the relationship between government, the market, and other institutions within society.

1. Introduction

The COVID-19 pandemic has caused varying degrees of damage followed by diverse paths to recovery around the world. There have been both successes and failures in the effort to contain the spread of the disease and mitigate its adverse effects on public health and the economy. Some economies have been able to swiftly and successfully contain the spread of the virus, allowing for remarkable recoveries, while others are still struggling with surging infections. In order to restore robust growth, market forces alone are inadequate to resolve the various issues at hand. Governments must step up to fill this void and play a key role in recovery. This paper aims to examine the importance of government in restoring economic growth.

This paper is divided into four sections. In the first section, I lay out the challenges faced by the public health sector, the measures required to contain the virus, and the difficulties in restoring growth. In the second section, I discuss why market forces fail, and explore the areas where government intervention is crucial. In the third section, I evaluate assumptions about the role of government in the market economy, revealing that economists often place an undue amount of confidence in the market to resolve problems on its own. Finally, I review the necessity of a new research in the fields of government and economics.

2. Mounting tasks in the lengthy path to Post-COVID economic recovery

2.1. difficulty controlling the disease impedes the speed of recovery.

The first issue to address is how to control the pandemic itself, which is crucial for a robust recovery. This requires more precautions and measures to be enforced. On one hand, we must normalize mask-wearing, enhance testing and tracing, maintain social distancing, and avoid congregation to contain the spread of the disease. We should also focus on increasing safety in high-risk environments, such as nursing homes.

On the other hand, we also have challenges to address when it comes to the effective treatment of the disease. Uncertainty remains since there is still little knowledge about the effectiveness of the therapeutics being used against this new disease. Although there are currently a few approved vaccines, their overall long-term effectiveness are still to be explored during widespread inoculation, especially concerning recently identified highly transmissible new variants in several countries.

In the US, while the vaccine roll-out was initially sluggish due to a shortage of mass production and difficulties in distributing and administering the shots, it has now picked up quickly, with millions of shots being administered every day. 1 Significant race-based disparities in vaccine take-up have also resulted in lower vaccination rates in Black and Hispanic communities compared to the white population, which is alarming given higher infection rates in the Black and Hispanic communities. Furthermore, some people distrust the healthcare system and are hesitant to receive the vaccine even when it is available. However, the US at least finds itself in a better position compared to a year ago, when there was little knowledge about the disease. More importantly, the new administration under President Biden has rolled out plans calling for more coordinated efforts across state and federal governments in mask-mandating, testing, vaccinations, treatments, medical care, etc. during its first 100 days. Moreover, in rejoining the World Health Organization, the US has once more united with the international community in efforts to combat the pandemic and its fallout.

Due to its continuing to mutate, and given the high level of contagiousness, COVID-19 cannot be fully controlled until every nation in the world succeeds.

2.2. Huge social costs associated with the pandemic

After a yearlong battle with the pandemic, the death toll of COVID-19 in the US surpassed 520,000 by early March—a staggering figure, comparable to the American lives lost in World War II, Korea, and Vietnam combined. With over twenty-eight million reported cases worldwide, COVID-19 amounts to the largest public health threat since the 1918 influenza pandemic. Although US cases have plummeted in recent weeks, the daily number of new infections is still above 50,000, partly due to the recently identified new variants. With a one-year decrease in life expectancy during the first half of 2020 reported by the Centers for Disease Control and Prevention, this pandemic may well have a long-term impact on public health.

Besides the damage caused to public health, the virus has had an equally significant economic impact on households and businesses across the nation. The US yearly GDP fell by 3.5% in 2020—the worst drop since World War II, though markedly less than that in Europe. After reaching a historical peak of 14.7% last April, the unemployment rate gradually declined to 6.2% in February 2021, which is still well above the 3.5% rate in February 2020, showing long-lasting stagnation in the labor market recovery. Moreover, these “headline” unemployment numbers mask the true depth of the weaknesses in the labor market, reflected more accurately in reductions in the level of employment.

2.3. The overall system of social protection does not provide sufficient help for the poor and vulnerable

The huge inequities and inefficiencies in the provision of care and treatment within the US healthcare system have impeded controlling the spread of the disease, and thereby the nation's recovery. First, about 9.2% of the American population (about 30 million people) lacks health insurance. This is a higher uninsured rate than most OECD economies, as shown in Fig. 1 . Unlike most countries in the sample, primary private coverage consists of a higher proportion relative to public coverage in the United States. Second, low-income individuals and people of color are more likely to lack health insurance coverage. 2 The dependence of more Americans on private employer-provided insurance means that the loss of jobs can also lead to a loss of insurance coverage—especially troublesome in the midst of pandemic.

Health insurance coverage.

The absence of unemployment insurance provides a weak buffer for the economy in the face of a crisis. For example, the proportion of income maintained after three months of unemployment in the US is 57%, lower than many developed economies in the OECD, as shown in Fig. 2 . The US rate declines to 8% after six months of unemployment, compared to a gradual drop to around 30% after 25 months for the OECD aggregates.

Public Expenditure as a Share of GDP

Replacement rate in unemployment insurance

Furthermore, due to the insufficient provision of paid sick leave, many employees cannot afford to stay home when they are ill, increasing difficulties in containing the spread of COVID-19. Before the pandemic, the United States had relatively low coverage of paid leave compared to other developed nations ( Heymann et al., 2009 and OECD, 2020 ). In response to the pandemic, the Families First Coronavirus Response Act was passed to offer two weeks of paid sick leave for workers on whom the virus had an impact, but only for certain public employers and private employers with fewer than 500 employees but more than 50 employees, excluding more than half of all workers. Thus, many infected Americans, especially when asymptomatic, have continued to work, partly because they do not have paid sick leave. This situation is most prevalent in people with a shortage of savings who are living paycheck to paycheck. Moreover, many low-wage employees are frontline workers who must continue to work outside of their homes during lockdowns. The high risk of exposure to the virus makes these workers more vulnerable, especially those who work in transportation, logistics, warehousing, and food industries. 3

2.4. A delayed and ill-designed stimulus package has prolonged the path to recovery

A slow and contentious legislative process with inadequate presidential leadership inhibited strong responses both to the disease and its economic aftermath. The COVID-19 packages passed in Spring 2020 were poorly designed and implemented, and much of the money meant to bring relief was not received by those most in need. Furthermore, the relief package was not designed for such an extensive crisis lasting over one year. State and local governments face severe budgetary constraints and are in dire need of additional funding. Still, the massive size of the programs made up for the deficiencies in design, partly accounting for the difference in the magnitude of the downturn between the US and some other advanced countries. The arrival of the Biden administration represented a substantial change. The disease was taken seriously; experts were listened to; science was given its due; competency in government began to be restored; and serious economic packages both to provide relief and to address longstanding deficiencies in the American economy began to be formulated. The passage of the $1.9 trillion Recovery Package has led to substantial upward revisions in expectations for the US economy, with the IMF projecting 6.4% growth for 2021, enabling America to exceed pre-pandemic projections by the end of the year.

2.5. Enormous hysteresis effects

One of the most important issues for restoring growth is addressing the economic damage of COVID-19, some of which could be long term, giving rise to hysteresis effects. The first of these is bankruptcy, which tends to be associated with a loss of human capital, organizational capital, and informational capital. These economic consequences occur, for instance, when small businesses are forced to dissolve and file for Chapter 7 4 bankruptcy. Such bankrupt firms will not be able to recover when the pandemic is over—they don't just become “unbankrupt.”

The second example of hysteresis effects are related to the impacts on corporate balance sheets; the deterioration in their balance sheets undermines the ability and willingness of corporations to make investments or even produce. Increases in defaults have also had an impact on bank balance sheets.

Third, the weakening of household balance sheets has led to less spending on durables due to decreases in income and wealth. The worsening of household and firm balance sheets and the increase in uncertainty in imperfect risk markets tends to prompt more precautionary savings, thus weakening aggregate demand.

All of the factors listed above have impeded the speed of recovery. The damage would have been limited if we had been able to bring the pandemic under control in a short period—say, six weeks. Yet, COVID-19 has been severely affecting life in the United States for over a year now, and it is expected to go on for even longer. This means greater damages and more obstacles to recovery.

Depending on the kinds of health and economic policies deployed not only in the United States, but also around the world, there is still much uncertainty regarding the path to recovery. It is still a possibility that COVID-19 may last for a very long time to come rather than subsiding as a temporary phenomenon. While the rapid deployment of effective vaccines and the strong measures taken by the Biden administration have provided hope that the end of this travail is in sight, the continued mutation of the disease and the large numbers of individuals who seem resistant to obtaining the vaccine are sources of concern.

There are many tasks ahead to restore robust economic growth. Economic policies should be aimed at mitigating or minimizing damage and putting us in a better position for recovery. For example, recovery will be easier if workers have been able to keep connections with their firms, both in the short-term and long-term. That means when business restarts, employers will not have lost their firm-specific human capital. Some countries have been more successful than others at keeping unemployment low, such as New Zealand, Germany, and most European countries. In contrast, the United States’ policy has been badly designed, poorly administered, costly, and relatively ineffective. Similarly, when small businesses are denied assistance, they go bankrupt, and society will be faced with the task of creating new businesses after the pandemic, which is much more difficult than keeping old businesses alive. Hence, there may be high costs associated with those early failures.

3. Why pure market forces are inadequate to restore economic growth

Decades of weak government intervention have left the health and economic systems of the United States fragile in the face of a prolonged pandemic. Arrow and Debreu (1954) established a set of conditions under which markets efficiently “solve” economic problems. However, those conditions are not typically satisfied and markets do not work well in general, in the sense that there are typically government interventions that can enhance economic (Pareto) efficiency. 5 In this section, we will discuss different aspects of the failure of market forces, and in the subsequent section we will outline the active roles that governments should take, and the past experiences of public intervention in several countries.

3.1. Externalities

The very nature of contagious disease creates an externality that is impossible to deal with through the price system. This means that one person's decision to go to work or do any activity that might expose someone else imposes a cost on others that he does not pay for. The best response would be to have action-specific taxes, i.e. interaction-specific taxes, which are difficult to impose. That is why we instead have very imperfect instruments of public intervention such as lockdowns, quarantines, and so forth to stop the spread of the disease. There are also measures, such as paid sick leave, which affect behavior in ways that reduce adverse externalities. Unfortunately, as previously mentioned opposition from big companies resulted in large fractions of the workforce not having paid sick leave. A second type of externality is related to the macroeconomy. The bankruptcy of one firm affects others, while the rescue of one firm has social benefits as well. There are many other aspects of behavior that give rise to macroeconomic externalities, such as excessive foreign denominated debt.

3.2. Absence of the market for risk

Particularly relevant to behavior throughout the pandemic is the absence of risk markets. 6 If there were good insurance markets, individuals and businesses would have been able to purchase insurance against the ravages of the disease and its economic consequences. One of the striking things in the United States and other countries is that many businesses thought they had bought insurance to cover business interruption. Businesses paid thousands of dollars of premiums every year to guard against an event just like this. But this turned out to be in vain, as the insurance companies claimed that fine print in the policies meant that the business interruption resulting from the Covid-19 lockdown was not covered.

The absence of good insurance markets also has significant macroeconomic implications, as it leads to strong precautionary behavior by households and firms, which reduces aggregate demand.

Thus Covid-19 has exposed the importance of this key “market failure,” imperfect risk markets, as well as related market failures—the difficulties of enforcing contracts, including those that arise from the ambiguity of language.

3.3. Compensation for firms in preparation for disaster

The last important market failure associated with risk is the need to compensate firms for undertaking activities that will only be of value in unusual events. Such activities include building stockpiles of masks, protective gear, ventilators, etc. However, compensation for something that occurs once every 10 to 20 years does not exist. This is why it is a public responsibility to address these contingencies.

4. The proper role of government in post-COVID recovery

What are the roles of government? Covid-19 has illustrated the important roles that government can and should play. As we discussed in Section 2 , the more effectively the government can control the pandemic and its economic aftermath, the smaller the lasting damages will be and the sooner recovery will take place. Beyond the public health aspects of recovery, there are multiple roles the government can fill, especially when it comes to fixing problems that the market cannot resolve on its own. The following subsections highlight more generally some of the many roles that government needs to play more generally.

4.1. Regulation

The first role the government must play is regulation. Private companies have an incentive to make money, but they often accomplish this by taking advantage of others. For example, we have seen this in the previously mentioned exploitation by insurance companies during the pandemic. Governments must impose regulations to prevent such exploitation and pursue other social goals. 7 Imperfect and asymmetric information, incomplete risks markets, and other market failures imply that price interventions by themselves do not work well compared to price interventions accompanied by regulation and other government actions.

4.2. Socialization of risks

A second role of the government is to provide social insurance. Individuals face many significant risks that are not insured (or insurable) by private markets, such as unemployment, retirement, and social security. Private markets especially fail when there are correlated risks that affect everyone, and in such circumstances the government should act as a reinsurance company of last resort. So too for macroeconomic events where systemic risk is beyond the capacity of any insurance company, social insurance must be provided. 8 And we must consider the macroeconomic implications of counterparty risk.

This is not a new role for the government, but public policy seems to have a short memory of previously learned lessons. For example, companies writing insurance went bankrupt during the 1997 Asian financial crisis, with the consequence that those who thought they had purchased insurance were not covered.

4.3. Mitigating the moral hazard problem

Whenever individuals obtain insurance, there is the possibility of “moral hazard,” that they will not take the action required to mitigate the moral hazard. How significant these adverse incentive effects is often not clear. A judgment must be made about how important the moral hazard effects are relative to the value of risk mitigation.

Let us look at one example that is being debated in the United States in terms of a very specific program—unemployment, one of the risks associated with the disease. Private markets never provide unemployment insurance, and therefore every society relies on publicly provided unemployment insurance. With stronger unemployment insurance, there may be some incentive not to search for a new job. The question is how important such a moral hazard is. Unemployment insurance is a fraction of their normal income and most individuals know that it is only temporary. Knowing how hard it is to get a good job, they are not going to take advantage of unemployment insurance. They may not go to work because they're afraid of the virus, but the unemployment benefits are not going to drive their decision. Moreover, when there are few if any jobs available, individuals will not search: the lack of searching is not because of unemployment insurance, but because of the absence of employment opportunities.

There has been controversy in the United States because the original unemployment package raised benefits to compensate for a few states that provided only a small fraction of wages in unemployment benefits. To prevent people from going hungry or suffering in other ways, the government granted $600 per week in addition to normal unemployment benefits, resulting in higher unemployment pay than wages. However, a cross-state empirical study found no evidence supporting the argument that the above unemployment insurance discouraged people from working. 9 Although young people who believe they are invincible continue to take risks, the extent to which they do this is not affected by their insurance. Conversely, old people who are cautious do not take risks no matter what their insurance is like. Overall, insurance has a second-order effect.

4.4. Lessons on the role of government from US economic history and East Asian economic growth

The first lesson is that the government must step in to solve problems of market failures, e.g. associated with large externalities. The creation of new institutions brings societal change, which generate large societal externalities. Arrow (1962 a, b ) and Stiglitz (1987) show too that markets are inefficient in the allocation of resources to innovation in both how and how much they direct that innovation. 10 The countries that have had rapid economic growth over the past half century, including those in East Asia, have typically dealt with market failures better than those countries that have failed to grow.

The second lesson is that integral support from the government for market development is extremely important. It is hard to identify any economy that has achieved successful development in the absence of strong government intervention. This was the case for US economic growth in the 19 th and early 20 th centuries as well as in the rapid economic growth in East Asia and China since the end of World War II.

In the 19 th century, the United States was an agricultural economy. The government supported agricultural extension services to boost productivity in agriculture and bring technology to farmers across the country. It was again the government that facilitated the structural transformation from an agricultural economy to a manufacturing economy after the Great Depression. The massive expenditures for World War II also facilitated the transformation of the US economy. The huge research expenditures in World War II and afterward during the Eisenhower administration, especially the support of US research universities, were instrumental in providing the US with its technological leadership in many areas. The improvement of the standard of living in the US has been based upon publicly funded basic research; the private sector simply would not have provided adequate support on its own.

Government has also played an important role in the East Asian Miracle. 11 For successful East Asian economies, the key has been not to move the technology frontier, but to bring in knowledge from elsewhere and catch up. Markets alone cannot achieve this goal. When I was chief economist at the World Bank, we argued that what separated developing from developed countries was the gap in knowledge, not just the gap in resources. Markets work to maintain such knowledge gaps, and government is needed to overcome them. 12

This view has been increasingly recognized. In Mariana Mazzucato's book, The Entrepreneurial State , she emphasizes the role of the government in promoting innovation. This is among the lessons we should learn from successful economies—that it is only through state action that market failures can be (partially) overcome to achieve sustained growth. In the case of the East Asian Miracle, this gave birth to the concept of “the developmental state.” A few countries in Africa have invoked this idea, and it has contributed to their successes in development. Mazzucato, 2013

5. The case for systemic studies of government and economics

To ignore the role of government is to ignore a very large fraction of the economy—in some places the public sector makes up 30% of the economy, while in others it comprises up to 60%. 13 A more general way to label the field of government and economics is “economics of government and collective action” since collective action can take place at many different levels (national, regional, provincial, local) and through a variety of mediums (government, unions, civil society, NGOs).

5.1. Economists are often wrong in making specific assumptions about the role of the government in the market economy

Many economists involved in policymaking are overly confident in the ability of the market to resolve problems. They recognize externalities and imperfect insurance markets, and they are able to realize that large risks must be socialized because no insurance company is capable of bearing them. However, when it comes to government policy many economists are prone to forget these truths and start championing the virtues of the market. Some believe that markets, even if they fail to solve all problems, it is better to rely on them than to turn to government. Of course, it is clear that governments don't always work. Anyone who has lived in the US or watched the country under the Trump administration understands the concept of government failure. And yet, if we look across the world, the most successful countries all have successful governments. New Zealand, for example, has done a fantastic job containing the pandemic, based on people's confidence in government, trust in science, and their social solidarity.

The lesson is simple: we need to work to create better institutions in both the public and private sector. In general, economists tend to mystify Adam Smith and misinterpret him as an advocate of unfettered markets. But in his book An Inquiry into the Nature and Causes of the Wealth of Nations , Smith spends page after page discussing the necessity of government to make sure the market works. His invisible hand is just a very small part of the book. He was extraordinarily sensitive not only to market failures in efficiency, but also to the inadequacy of markets in guarding against exploitation. Smith argued that government was needed to prevent the exploitation of workers and consumers. The government had an important role too in providing for education. Smith, 1976

5.2. Social sciences, political science, and public choice

Economics cannot be separated from political science and other social sciences. Political science is the study of government and the way we make decisions collectively. The government sets the rules and regulations that underpin the economy. It sets the interest rates and levels of taxes and expenditures that regulate the macroeconomy. It provides the infrastructure, the education, the basic research on which the economy relies. Public choice, influenced by James Buchanan, is a branch of economics that tries to address the incentives of public decision-makers. However, this field has been less successful than hoped because it is founded on the belief that everyone is selfish and power-hungry.

However, there is a great deal of research to show that people are not utterly selfish. We see this within our families, where we hope to interact with one another in ways that are not utterly selfish. We also see this within our country and the world, which is full of people who have devoted their lives to helping others. Thus, public choice theory embodies a particularly narrow view of human nature. One of my own strands of research in recent years that I have done with Karla Hoff ( Hoff and Stiglitz, 2016 ) and others is to develop a theory of endogenous preferences and behavior. Among the questions we have asked is the following: what are the factors that determine the extent to which people act in an altruistic way versus the extent to which they act selfishly?

5.3. The need for new methodologies to study government and economics

To study government and economics, we should deploy a wide variety of techniques including theoretical research, case studies, and historical studies.

First, we must form a strong theoretical foundation to inform studies in government and economics. We need theoretical foundations regarding the nature of the individual, society, and their interaction. Much of the fashionable recent work in economics has taken a particularly narrow view. It has also focused on situations where the economy is assumed to be (almost) always in equilibrium. For example, dynamic stochastic general equilibrium models (DSGE), one of the standard macroeconomic models, always assume equilibrium even though every interesting situation occurs during disequilibrium, such as the unanticipated shocks and financial crises of 2008 and 2020. 14

Second, care has to be taken in making the right assumptions. We always have to simplify. But making the wrong simplifications will, for instance, lead to the wrong policies. Our earlier discussion has provided multiple examples. For instance, in Covid-19, the first-order effect among firms and upper income individuals was an increase in precautionary behavior, which is not part of the standard DSGE model.

Spending all one's energy solving complex problems of intertemporal substitution takes away attention from other problems, such as the responses to changes in risk. Similarly, today, in thinking about climate change, the standard economic models focus more on the intertemporal effects than on the overwhelming risks that it poses.

Third, we must properly utilize other disciplines. Economists should draw more upon research from other disciplines such as sociology, political science, and psychology. One example is Elinor Ostrom's seminal contribution to economics as a political scientist. 15 The prior presumption among right-wing economists for managing local externalities associated with the common pool problem (such as associated with fisheries) was always to assign property rights according to the Coase Theorem. However, Ostrom (1990) identifies an alternative– regulatory frameworks– to prevent overfishing which have worked well in many developing countries. Furthermore, she showed that the property rights solution had significant disadvantages including high transaction costs and the tendency to lead to inequality.

6. Conclusion

In addition to the provision of a fiscal stimulus package, there is a long list of other ways in which the government is needed to fill the gaps of the market in facilitating a robust economic recovery. To name a few, beyond ensuring full employment, these include, regulating externalities, promoting robust competition, guarding against exploitation, limiting market power, and providing social protection. In the countries with the most successful COVID-19 responses, government has played these roles effectively.

The pandemic has laid bare the dire need for reforms to create good governance, addressing both government and market failures, and improve institutions. Unfortunately, in some Western countries, including the United States, there is a pervasive and unfounded belief that the market will solve everything on its own. However, wealthy and powerful market players tend to work against solutions that are best for society as a whole when it means they must relinquish some of their money and authority, hence the need for government intervention. But those same forces will try to impede the government undertaking the roles which it should play. Moreover, some governments are corrupt. The power to do good also enables the capability to do bad, as seen in the Trump administration. Thus, we must work to correct market failures and government failures. It is a never-ending struggle to create good institutions.

That is why research on government and economics is important. It is only by studying these institutions and finding out when they succeed and when they fail that we can move toward building better institutions. We are never going to create perfect institutions, but I believe we can create better institutions both in the public and private sector, and develop better frameworks for them to work together and with others, including civil society and NGO's.

Declaration of Competing Interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

1 According to the Centers for Disease Control and Prevention (CDC), the share of total population having received 1 or more doses of vaccine, and both doses, are 17.7% and 9.2% respectively by March 7, 2021.

2 According to the 2019 National Health Interview Survey for adults aged 18-64, 25.8% of those categorized as poor (with income less than 100% of the Federal Poverty Level) are without health insurance, compared to 9% for those not categorized as poor (with income of 200% FPL or greater). Additionally, 29.7% of the Hispanic population and 14.7% of the non-Hispanic Black population are uninsured, compared to 10.5% for non-Hispanic white individuals. Artiga et al. (2020) find that under the Affordable Care Act between 2010 and 2018, Black Americans were 1.5 times more likely to lack insurance than white Americans, and the uninsured rate of Hispanic people was 2.5 times higher than that of whites.

3 See for example, Berube and Bateman (2020) and Tomaskovic-Devey et al. (2020) .

4 Chapter 7 is an option for corporations and limited liability companies going out of business for help facilitate an orderly liquidation.

5 As discussed in Stiglitz (1993) , these conditions are “extremely special and empirically irrelevant”. A large amount of literature shows that these conditions are essentially the only conditions under which markets are efficient. Greenwald and Stiglitz (1986) illustrate that when markets are incomplete or there is imperfect information, markets are not constrained Pareto efficient.

6 Rothschild and Stiglitz (1976) characterize insurance market equilibrium under adverse selection and show that competitive equilibrium may not exist. Stiglitz and Yun (2013) study how the presence of moral hazard and adverse selection affect the optimal and equilibrium insurance contracts and discuss the role of the market and the government in implementing optimal allocation.

7 See Stiglitz (2009) for further discussions on the rational for government intervention as well as the types and instruments of regulation.

8 Stiglitz and Yun (2014) offer an explorative design of a social insurance program, income contingent loans, which effectively provide interstate and intertemporal smoothing with minimal adverse effects on incentives.

9 See Bartik et al. (2020) , Finamor and Scott (2021) , and Marinescu et al. (2020) .

10 Innovation is inherently risky, marked by imperfect information and incomplete insurance markets. As a public good, knowledge cannot be supplied efficiently by private markets.

11 Stiglitz (2016) provides a detailed review of the growth processes in these economies, where the state played a catalytic and a regulatory role, at the same time acknowledging the importance of markets. These economies depart from the Washington Consensus policies, which called for a small state, limited government activism, and paid no attention to inequality or social cohesion.

12 There is a potential role for the government since markets are not efficient in general when technology is endogenous. Policies aimed at improving the static allocation of resources often fail when promoting learning, advancing knowledge, and closing the knowledge gap within a country, as well as the gap between developing and developed economies.

13 There are different measures of the size of the public sector. Fig. 3 shows public expenditure as a share of GDP for G-20 countries, which vary from 16% for Indonesia to 56% for France in 2019.

14 Stiglitz (2018) provides a detailed assessment of the problematic micro foundations of DSGE models in incorporating aspects of economic behavior.

15 Ostrom is one of the few political scientists and the first woman to win the Nobel Prize in economics.

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Please note you do not have access to teaching notes, the execution of marketing strategies in a developing economy: a case study of selected market leaders.

African Journal of Economic and Management Studies

ISSN : 2040-0705

Article publication date: 14 March 2016

The purpose of this paper is to examine how market leaders use marketing strategies to maintain strong performance in their respective sectors within different economic contexts in an emerging developing economy.

Design/methodology/approach

Case studies of three consistent, high performing market leaders based on the Ghana Club 100 rankings over the past decade are conducted. This involves structured interviews with chief executive officers (CEOs) and chief marketing officers (CMOs) of the organisations studied.

The findings indicate that irrespective of the country of origin of the firm, or the economic context in a developing country, effective marketing strategies can be used to enhance the performance of organisations in their respective sectors.

Originality/value

The approach used in this paper enables the authors to address the effectiveness of the marketing strategies across the past three decades covering the periods of pre-, during and post-economic reforms, and to examine the influence of different types of ownership (local, mixed foreign/local ownership and a multinational) on the execution of marketing strategies in a developing economy.

• Developing economy
• Market leaders
• Marketing strategies

Appiah-Adu, K. and Amoako, G.K. (2016), "The execution of marketing strategies in a developing economy: A case study of selected market leaders", African Journal of Economic and Management Studies , Vol. 7 No. 1, pp. 9-29. https://doi.org/10.1108/AJEMS-07-2014-0052

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The Free Market Economy: A Breakdown for Entrepreneurs

Updated: March 11, 2024

Published: September 27, 2023

The free market economy has been a hot topic since the concept was first developed over 250 years ago. The term gets thrown around frequently, often incorrectly, as a synonym for capitalism. 

While many people believe the US is the world’s leading free market, the American economy is more restrictive than some other countries’ economies. As an entrepreneur, you need to understand how the free market economy affects startups and small businesses .

What is a free market economy?

A free market economy is one where the supply and demand of a market is not controlled by the government or any other regulating body. This means no taxes, tariffs, quotas, or external quality-control checks.

This system is viewed as one in which each factor of the economy regulates the others. Prices, wages, and other exchanges of goods and services are determined by market forces and self-interest. The implication is that the price will increase if there is a greater demand for a product. Likewise, if there is little demand, prices should decrease. 

A free market economy is also described as laissez-faire, or “let them do” in English, an economic system where government intervention is frowned upon. These ideas were popularized in America by followers of 18th-century Scottish economist Adam Smith.

This system is in contrast to a command economy, where prices and quotas on goods are determined by the government.

In a free market economy, business owners can set prices themselves. In theory, there are fewer external factors to account for when determining prices, so you don’t need to factor in tariffs or pay attention to market caps.

Customers can benefit because there is often increased competition . With fewer barriers to entry, more businesses open to meet demand. While customers might pay more for an item when demand is high, businesses can increase production to up the supply, meaning prices go down faster as well.

Common constraints to the free market economy

Occupational licensing

An occupational license is any license you need in order to have a specific job. According to the Bureau of Labor Statistics, occupational license requirements that vary by location can affect where people live and work. 

Michigan, for example, requires three years of training to become a licensed security guard, while North Carolina only requires 16 hours . This means businesses will have a much easier time finding and training guards if they are in North Carolina.

Price controls, tariffs, and taxation

Almost all countries have some form of taxation and tariffs on goods and services, which can affect the price of finished goods.

Sometimes there are also price controls , which are government regulations that limit what you are allowed to charge for a particular good or service. In some cases, government subsidies pay producers to change production to help control supply and pricing. These controls are usually placed on essential goods and services such as food, utilities, and even rent. 

While these can help consumers in the short term, they can also discourage new businesses from entering a market. These controls can also lead to an increase in black-market goods .

Illegal goods

Governments often forbid or restrict the sale of certain goods to protect the health of consumers, follow social norms, and to protect the intellectual property rights of businesses and individuals. For example, competing businesses can’t sell copies of a product another company has a patent on.

Health and safety rules can forbid dangerous substances like heroin or normally safe foods with unsafe items added to them, like Kinder chocolate eggs .

Monopolies form when one company controls an entire market. In many places, utilities are run as a monopoly, with one water or electric provider servicing an entire city or county.

These can be useful in cases like airports, where strict rules and regulations mean heavy oversight is required. However, in most markets, monopolies don’t benefit consumers and artificially raise prices while lowering service quality. 

Examples of a free market economy 

Textbook example.

In a pure free market economy, the laws of supply and demand are the main driving factors, with no government intervention.

For example, say that Tammy wants to open an ice cream store. In a free market economy, her only barriers to entry are the prices of raw materials, finding a store to rent, and paying staff if she needs help running her store. 

Tammy doesn’t need to worry about health codes, price controls on dairy, state regulations, permits, or having to pay business taxes. 

Real-world application

In the real world, no country has a totally free market economy. Just think of the example above. Most governments set cleanliness standards for maintaining the ice cream and equipment to protect consumers from foodborne illnesses.

There are a lot of variations between countries in how free their economies are. According to the Heritage Foundation’s 2023 Index of Economic Freedom, Singapore has the freest economy in the world , while the US only ranks 25th because of much stronger consumer protections, complex taxes, tariffs, and other regulations such as interstate commerce rules.

Navigating the free market as an entrepreneur 

How free an economy is can have a big impact on businesses in everything from how difficult it is to enter a market to what your profit margin will be.

Few barriers to entry

One of the greatest incentives entrepreneurs have in a free market economy is the low barriers to entry. While this can increase the chances that some businesses won’t succeed because they form without support or training, it’s also a system that rewards hard work and creativity.

“This characteristic empowers individuals to bring their concepts to fruition, fostering an environment ripe for innovation. Yet this dynamic also necessitates constant evolution and differentiation to stand out amidst the sea of competitors,” notes Bader Chowdry, CPA and founder of accounting firm Insight Accounting .

The invisible hand (laissez-faire) 

In capitalist economies, economists will talk about an “invisible hand” helping to regulate the market. This is the idea that even without government control, things like wages and prices will naturally adjust to meet demand.

The theory helps to explain why certain jobs are paid above minimum wage. After all, the more money a business owner offers, the larger the pool of job applicants will be. And in sectors with high demand, more entrepreneurs rush to start businesses.

The free market economy allows businesses to charge the most that customers are willing to pay, much like a capitalist system.

“In a capitalist system, profit maximization is the overarching goal of every business. In many circumstances, firms will put profit ahead of employee welfare, environmental protection, and even ethical conduct,” notes Ryan Steinolfson, owner of Accelerate Your Marketing , a digital marketing firm.

However, the free market can be self-regulating. If companies continually overcharge, produce unsafe products, or are otherwise objectionable to consumers, competitors will launch new businesses to fill the gaps. 

The free market means that what sells is determined by the market. Try out new ideas and see what strikes a chord with your customers. You might find some ideas don’t really connect, while others might surprise you.

Taking the leap and experimenting is often rewarding for entrepreneurs in a free market economy.

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The Philippines economy in 2024: Stronger for longer?

The Philippines ended 2023 on a high note, being the fastest growing economy across Southeast Asia with a growth rate of 5.6 percent—just shy of the government's target of 6.0 to 7.0 percent. 1 “National accounts,” Philippine Statistics Authority, January 31, 2024; "Philippine economic updates,” Bangko Sentral ng Pilipinas, November 16, 2023. Should projections hold, the Philippines is expected to, once again, show significant growth in 2024, demonstrating its resilience despite various global economic pressures (Exhibit 1). 2 “Economic forecast 2024,” International Monetary Fund, November 1, 2023; McKinsey analysis.

The growth in the Philippine economy in 2023 was driven by a resumption in commercial activities, public infrastructure spending, and growth in digital financial services. Most sectors grew, with transportation and storage (13 percent), construction (9 percent), and financial services (9 percent), performing the best (Exhibit 2). 3 “National accounts,” Philippine Statistics Authority, January 31, 2024. While the country's trade deficit narrowed in 2023, it remains elevated at $52 billion due to slowing global demand and geopolitical uncertainties. 4 “Highlights of the Philippine export and import statistics,” Philippine Statistics Authority, January 28, 2024. Looking ahead to 2024, the current economic forecast for the Philippines projects a GDP growth of between 5 and 6 percent.

Inflation rates are expected to temper between 3.2 and 3.6 percent in 2024 after ending 2023 at 6.0 percent, above the 2.0 to 4.0 percent target range set by the government. 5 “Nomura downgrades Philippine 2024 growth forecast,” Nomura, September 11, 2023; “IMF raises Philippine growth rate forecast,” International Monetary Fund, July 16, 2023.

For the purposes of this article, most of the statistics used for our analysis have come from a common thread of sources. These include the Central Bank of the Philippines (Bangko Sentral ng Pilipinas); the Department of Energy Philippines; the IT and Business Process Association of the Philippines (IBPAP); and the Philippines Statistics Authority.

The state of the Philippine economy across seven major sectors and themes

In the article, we explore the 2024 outlook for seven key sectors and themes, what may affect each of them in the coming year, and what could potentially unlock continued growth.

Financial services

The recovery of the financial services sector appears on track as year-on-year growth rates stabilize. 6 Philippines Statistics Authority, November 2023; McKinsey in partnership with Oxford Economics, November 2023. In 2024, this sector will likely continue to grow, though at a slower pace of about 5 percent.

Financial inclusion and digitalization are contributing to growth in this sector in 2024, even if new challenges emerge. Various factors are expected to impact this sector:

• Inclusive finance: Bangko Sentral ng Pilipinas continues to invest in financial inclusion initiatives. For example, basic deposit accounts (BDAs) reached $22 million in 2023 and banking penetration improved, with the proportion of adults with formal bank accounts increasing from 29 percent in 2019 to 56 percent in 2021. 7 “Financial inclusion dashboard: First quarter 2023,” Bangko Sentral ng Pilipinas, February 6, 2024.
• Digital adoption: Digital channels are expected to continue to grow, with data showing that 60 percent of adults who have a mobile phone and internet access have done a digital financial transaction. 8 “Financial inclusion dashboard: First quarter 2023,” Bangko Sentral ng Pilipinas, February 6, 2024. Businesses in this sector, however, will need to remain vigilant in navigating cybersecurity and fraud risks.
• Unsecured lending growth: Growth in unsecured lending is expected to continue, but at a slower pace than the past two to three years. For example, unsecured retail lending for the banking system alone grew by 27 percent annually from 2020 to 2022. 9 “Loan accounts: As of first quarter 2023,” Bangko Sentral ng Pilipinas, February 6, 2024; "Global banking pools,” McKinsey, November 2023. Businesses in this field are, however, expected to recalibrate their risk profiling models as segments with high nonperforming loans emerge.
• High interest rates: Key interest rates are expected to decline in the second half of 2024, creating more accommodating borrowing conditions that could boost wholesale and corporate loans.

Supportive frameworks have a pivotal role to play in unlocking growth in this sector to meet the ever-increasing demand from the financially underserved. For example, financial literacy programs and easier-to-access accounts—such as BDAs—are some measures that can help widen market access to financial services. Continued efforts are being made to build an open finance framework that could serve the needs of the unbanked population, as well as a unified credit scoring mechanism to increase the ability of historically under-financed segments, such as small and medium-sized enterprises (SMEs), to access formal credit. 10 “BSP launches credit scoring model,” Bangko Sentral ng Pilipinas, April 26, 2023.

Energy and Power

The outlook for the energy sector seems positive, with the potential to grow by 7 percent in 2024 as the country focuses on renewable energy generation. 11 McKinsey analysis based on input from industry experts. Currently, stakeholders are focused on increasing energy security, particularly on importing liquefied natural gas (LNG) to meet power plants’ requirements as production in one of the country’s main sources of natural gas, the Malampaya gas field, declines. 12 Myrna M. Velasco, “Malampaya gas field prod’n declines steeply in 2021,” Manila Bulletin , July 9, 2022. High global inflation and the fact that the Philippines is a net fuel importer are impacting electricity prices and the build-out of planned renewable energy projects. Recent regulatory moves to remove foreign ownership limits on exploration, development, and utilization of renewable energy resources could possibly accelerate growth in the country’s energy and power sector. 13 “RA 11659,” Department of Energy Philippines, June 8, 2023.

Gas, renewables, and transmission are potential growth drivers for the sector. Upgrading power grids so that they become more flexible and better able to cope with the intermittent electricity supply that comes with renewables will be critical as the sector pivots toward renewable energy. A recent coal moratorium may position natural gas as a transition fuel—this could stimulate exploration and production investments for new, indigenous natural gas fields, gas pipeline infrastructure, and LNG import terminal projects. 14 Philippine energy plan 2020–2040, Department of Energy Philippines, June 10, 2022; Power development plan 2020–2040 , Department of Energy Philippines, 2021. The increasing momentum of green energy auctions could facilitate the development of renewables at scale, as the country targets 35 percent share of renewables by 2030. 15 Power development plan 2020–2040 , 2022.

Growth in the healthcare industry may slow to 2.8 percent in 2024, while pharmaceuticals manufacturing is expected to rebound with 5.2 percent growth in 2024. 16 McKinsey analysis in partnership with Oxford Economics.

Healthcare demand could grow, although the quality of care may be strained as the health worker shortage is projected to increase over the next five years. 17 McKinsey analysis. The supply-and-demand gap in nursing alone is forecast to reach a shortage of approximately 90,000 nurses by 2028. 18 McKinsey analysis. Another compounding factor straining healthcare is the higher than anticipated benefit utilization and rising healthcare costs, which, while helping to meet people's healthcare budgets, may continue to drive down profitability for health insurers.

Meanwhile, pharmaceutical companies are feeling varying effects of people becoming increasingly health conscious. Consumers are using more over the counter (OTC) medication and placing more beneficial value on organic health products, such as vitamins and supplements made from natural ingredients, which could impact demand for prescription drugs. 19 “Consumer health in the Philippines 2023,” Euromonitor, October 2023.

Businesses operating in this field may end up benefiting from universal healthcare policies. If initiatives are implemented that integrate healthcare systems, rationalize copayments, attract and retain talent, and incentivize investments, they could potentially help to strengthen healthcare provision and quality.

Businesses may also need to navigate an increasingly complex landscape of diverse health needs, digitization, and price controls. Digital and data transformations are being seen to facilitate improvements in healthcare delivery and access, with leading digital health apps getting more than one million downloads. 20 Google Play Store, September 27, 2023. Digitization may create an opportunity to develop healthcare ecosystems that unify touchpoints along the patient journey and provide offline-to-online care, as well as potentially realizing cost efficiencies.

Consumer and retail

Growth in the retail and wholesale trade and consumer goods sectors is projected to remain stable in 2024, at 4 percent and 5 percent, respectively.

Inflation, however, continues to put consumers under pressure. While inflation rates may fall—predicted to reach 4 percent in 2024—commodity prices may still remain elevated in the near term, a top concern for Filipinos. 21 “IMF raises Philippine growth forecast,” July 26, 2023; “Nomura downgrades Philippines 2024 growth forecast,” September 11, 2023. In response to challenging economic conditions, 92 percent of consumers have changed their shopping behaviors, and approximately 50 percent indicate that they are switching brands or retail providers in seek of promotions and better prices. 22 “Philippines consumer pulse survey, 2023,” McKinsey, November 2023.

Online shopping has become entrenched in Filipino consumers, as they find that they get access to a wider range of products, can compare prices more easily, and can shop with more convenience. For example, a McKinsey Philippines consumer sentiment survey in 2023 found that 80 percent of respondents, on average, use online and omnichannel to purchase footwear, toys, baby supplies, apparel, and accessories. To capture the opportunity that this shift in Filipino consumer preferences brings and to unlock growth in this sector, retail organizations could turn to omnichannel strategies to seamlessly integrate online and offline channels. Businesses may need to explore investments that increase resilience across the supply chain, alongside researching and developing new products that serve emerging consumer preferences, such as that for natural ingredients and sustainable sources.

Manufacturing

Manufacturing is a key contributor to the Philippine economy, contributing approximately 19 percent of GDP in 2022, employing about 7 percent of the country’s labor force, and growing in line with GDP at approximately 6 percent between 2023 and 2024. 23 McKinsey analysis based on input from industry experts.

Some changes could be seen in 2024 that might affect the sector moving forward. The focus toward building resilient supply chains and increasing self-sufficiency is growing. The Philippines also is likely to benefit from increasing regional trade, as well as the emerging trend of nearshoring or onshoring as countries seek to make their supply chains more resilient. With semiconductors driving approximately 45 percent of Philippine exports, the transfer of knowledge and technology, as well as the development of STEM capabilities, could help attract investments into the sector and increase the relevance of the country as a manufacturing hub. 24 McKinsey analysis based on input from industry experts.

To secure growth, public and private sector support could bolster investments in R&D and upskill the labor force. In addition, strategies to attract investment may be integral to the further development of supply chain infrastructure and manufacturing bases. Government programs to enable digital transformation and R&D, along with a strategic approach to upskilling the labor force, could help boost industry innovation in line with Industry 4.0 demand. 25 Industry 4.0 is also referred to as the Fourth Industrial Revolution. Priority products to which manufacturing industries could pivot include more complex, higher value chain electronic components in the semiconductor segment; generic OTC drugs and nature-based pharmaceuticals in the pharmaceutical sector; and, for green industries, products such as EVs, batteries, solar panels, and biomass production.

Information technology business process outsourcing

The information technology business process outsourcing (IT-BPO) sector is on track to reach its long-term targets, with $38 billion in forecast revenues in 2024. 26 Khriscielle Yalao, “WHF flexibility key to achieving growth targets—IBPAP,” Manila Bulletin , January 23, 2024. Emerging innovations in service delivery and work models are being observed, which could drive further growth in the sector.

The industry continues to outperform headcount and revenue targets, shaping its position as a country leader for employment and services. 27 McKinsey analysis based in input from industry experts. Demand from global companies for offshoring is expected to increase, due to cost containment strategies and preference for Philippine IT-BPO providers. New work setups continue to emerge, ranging from remote-first to office-first, which could translate to potential net benefits. These include a 10 to 30 percent increase in employee retention; a three- to four-hour reduction in commute times; an increase in enabled talent of 350,000; and a potential reduction in greenhouse gas emissions of 1.4 to 1.5 million tons of CO 2 per year. 28 McKinsey analysis based in input from industry experts. It is becoming increasingly more important that the IT-BPO sector adapts to new technologies as businesses begin to harness automation and generative AI (gen AI) to unlock productivity.

Talent and technology are clear areas where growth in this sector can be unlocked. The growing complexity of offshoring requirements necessitates building a proper talent hub to help bridge employee gaps and better match local talent to employers’ needs. Businesses in the industry could explore developing facilities and digital infrastructure to enable industry expansion outside the metros, especially in future “digital cities” nationwide. Introducing new service areas could capture latent demand from existing clients with evolving needs as well as unserved clients. BPO centers could explore the potential of offering higher-value services by cultivating technology-focused capabilities, such as using gen AI to unlock revenue, deliver sales excellence, and reduce general administrative costs.

Sustainability

The Philippines is considered to be the fourth most vulnerable country to climate change in the world as, due to its geographic location, the country has a higher risk of exposure to natural disasters, such as rising sea levels. 29 “The Philippines has been ranked the fourth most vulnerable country to climate change,” Global Climate Risk Index, January 2021. Approximately $3.2 billion, on average, in economic loss could occur annually because of natural disasters over the next five decades, translating to up to 7 to 8 percent of the country’s nominal GDP. 30 “The Philippines has been ranked the fourth most vulnerable country to climate change,” Global Climate Risk Index, January 2021.

The Philippines could capitalize on five green growth opportunities to operate in global value chains and catalyze growth for the nation:

• Renewable energy: The country could aim to generate 50 percent of its energy from renewables by 2040, building on its high renewable energy potential and the declining cost of producing renewable energy.
• Solar photovoltaic (PV) manufacturing: More than a twofold increase in annual output from 2023 to 2030 could be achieved, enabled by lower production costs.
• Battery production: The Philippines could aim for a $1.5 billion domestic market by 2030, capitalizing on its vast nickel reserves (the second largest globally). 31 “MineSpans,” McKinsey, November 2023.
• Electric mobility: Electric vehicles could account for 15 percent of the country’s vehicle sales by 2030 (from less than 1 percent currently), driven by incentives, local distribution, and charging infrastructure. 32 McKinsey analysis based on input from industry experts.
• Nature-based solutions: The country’s largely untapped total abatement potential could reach up to 200 to 300 metric tons of CO 2 , enabled by its biodiversity and strong demand.

The Philippine economy: Three scenarios for growth

Having grown faster than other economies in Southeast Asia in 2023 to end the year with 5.6 percent growth, the Philippines can expect a similarly healthy growth outlook for 2024. Based on our analysis, there are three potential scenarios for the country’s growth. 33 McKinsey analysis in partnership with Oxford Economics.

Slower growth: The first scenario projects GDP growth of 4.8 percent if there are challenging conditions—such as declining trade and accelerated inflation—which could keep key policy rates high at about 6.5 percent and dampen private consumption, leading to slower long-term growth.

Soft landing: The second scenario projects GDP growth of 5.2 percent if inflation moderates and global conditions turn out to be largely favorable due to a stable investment environment and regional trade demand.

Accelerated growth: In the third scenario, GDP growth is projected to reach 6.1 percent if inflation slows and public policies accommodate aspects such as loosening key policy rates and offering incentive programs to boost productivity.

Focusing on factors that could unlock growth in its seven critical sectors and themes, while adapting to the macro-economic scenario that plays out, would allow the Philippines to materialize its growth potential in 2024 and take steps towards achieving longer-term, sustainable economic growth.

Jon Canto is a partner in McKinsey’s Manila office, where Frauke Renz is an associate partner, and Vicah Villanueva is a consultant.

The authors wish to thank Charlene Chua, Charlie del Rosario, Ryan delos Reyes, Debadrita Dhara, Evelyn C. Fong, Krzysztof Kwiatkowski, Frances Lee, Aaron Ong, and Liane Tan for their contributions to this article.

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