Foreign investors are attracted in search of new opportunities for earning profit.
Foreign investment simply refers to a controlling ownership in a business enterprise in one country by an entity based in another country. ‘Coca-Cola came to Nigeria in 1953’ (DoubleGist, 2013). Ever since then the Coca-Cola industry has been making waves in Nigeria.
‘ Low level of bureaucracy.
Unlike when the government wants to make decisions or amend decision already the private sector can easily make decisions on what they want to produce, how they want to produce and for whom they want to produce.
‘ Prices are based on what target population can afford.
At the onset, when GSM came into Nigeria only the rich could pay for it. The poor and middle class had to drain their whole savings just to obtain one. Customers paid per minute and in situations when a customer doesn’t use up the entire minute, logically the customer hasthrown or put in money for service that was never consumed. Looking back we would remember that at some point MTN said that ‘per second billing was absolutely impossible’. Now looking at things today, the former all-expensive GSM which was only accessible to the rich has become something everyone makes use of both the rich, the poor and the middle class as the prices of both GSM lines and call charges have fallen. Lines that were sold for N20,000 at around 2001 are now being sold for a giveaway prize of N100 and at times for free with a number of value added benefits.
Among the disadvantages are;
‘ One-sided investment priorities as wealth is directed to whatever will earn the largest profit and not to what people actually need (Public goods e.g. public health centres, public schools, etc.)
‘ There is a gap in the middle of the rich and the poor. As a free market economy gives equal chance to everyone to venture into any business of their choice and make as much out of it, people are in charge of their lives
‘ Increase in criminal activities in the economy as people try to acquire wealth by all means available when legal means are not available. This situation can as well be likened to the case of unemployment.
In Nigeria for example, due to the fact that there is presently high level of unemployment, there will obviously be high crime rate as well e.g. armed robbery, an illegal way of making money. ‘According to the National Bureau of Statistics (NBS), the rate of unemployment in Nigeria stood at 23.9 per cent in 2011, while urban unemployment was estimated at 29.5 per cent in 2013’ .
‘ It can lead to market failure.
When a free market economy gets out of control the consequences are usually very severe. ‘From the Great Depression of the 1930s to the real estate market crash of 2008, market failures have devastated the lives of millions in lost income, unemployment and homelessness’ (Gerald Hanks). Many of these failures have stemmed from those seeking short-term profits over slow and steady gains, usually aided by loose credit, highly-leveraged assets and minimal government intervention.
‘ The free market make encourage the consumption of harmful goods.
In US now for example, there is high rate of consumption of harmful goods as private individuals are allowed to venture into any kind of business they want e.g. production and selling of guns in the US. No wonder in US we hear of increasing rate of murder cases.
Market failure occurs when the forces of demand and supply have failed to allocate resources efficiently which results to a loss of economic and social welfare.
REASONS FOR MARKET FAILURE
‘ Positive & negative externalities
‘ Short-term and long-term environmental concerns
‘ Lack of public goods
‘ Under-provision of merit goods
‘ Over-provision of demerit goods
‘ Information failure
‘ Abuse of monopoly power
‘ High levels of relative poverty
Government intervention can simply be referred to as the interference of the government in a market economy usually due market failure. It can also be referred to as a situation when the government take regulatory actions in order to affect or interfere with decisions made by private individuals regarding social and economic issues.
WAYS THE GOVERNMENT CAN CONTROL MARKET FAILURE
‘ Implementation of regulations.
Using Nigeria as an example, ”in 1995, inflation rate rose to 72.8% due to increased lending rate, the policy of guided deregulation and the lagged impactof fiscal indiscipline’ (FatukasiBayo, n.d.). As a result of this trend the Nigerian government employed several policies intended to control the level of inflation in the country. One of the policies used was the price policy also known as cost control in 1971 intended to deal with the expanding costs of crucial goods however was later put to an end in 1980 for its vain results. Due to the failure of the approach an alternative strategy was put in place to stabilize the inflation, ‘The Economic Recovery Emergency Fund of 1986′ (FatukasiBayo, n.d.). The point of this policy is to deduct one percent (1%) of workers’ salaries monthly to raise the funds intended to check inflation in Nigeria. Not to go further, numerous different methods were attempted by the government as a form of intervention. On the other hand, this is an example of government intervention using Nigeria’s inflation trends as an example and how the government had to interfere in order to curb it.
‘ Provision of subsidy
Still using Nigeria as an example, introduction of fuel subsidy,’The fuel subsidy payment was introduced as a policy into the Nigerian during the IBB (Ibrahim Babangida) administration of when our refineries failed due to no-maintenance’ (TransformationWatch, 2012). Looking at the time in history when Nigeria’s refineries failed due to no maintenance, this happened during the IBB (Ibrahim Babangida) administration. Here, the government had to intervene by introducing fuel subsidy to momentarily even out price of petroleum products while the refineries recovered from crash. Furthermore, ”money that is paid usually by a government to keep the price of a product or service low or to help a business or organization to continue to function’ (Merriam-Webster). Fuel subsidy refers to the part or portion of the total cost of fuel paid by the government in order to make price of fuel lower and affordable.
‘ Direct provision of public and merit goods.
Another example is the provision of public goods which is common to all or most countries around the world. Public goods can be defined as those goods and services provided by the government for the entire or general public, this goods are widely known for indiminishablility and non-excludability in the sense that they are enough to go round and nobody can be excluded from using or consuming them. Examples of such goods are power supply, water supply, good roads, etc. These goods come about due the fact that the private sector of the economy focus only on profitable goods and not essential goods, if the cost of producing essential goods is not profitable, the private individuals would abandon the venture for that good
CHINA ECONOMY SHOWING MARKET FAILURE
China is the second largest economy after USA. It I still considered as a rising economy. China used to be a planned economy. ‘According to the data released in 2010, Chinese State Owned Enterprises (SOE), only make up less than 5 percent of total enterprises in China, though they control almost 1/3 of total enterprise assets due to their big sizes (worldbank.org 2010)’ (Ricky, 2013). Since China became a capitalist economy (free market economy), it has experienced more than ten folds increase in its GDP (Gross Domestic Product). ‘China’s rapid economic growth began in the 1980s with the implementation of the so called reform and opening up policy proposed by Deng XiaoPing by introducing the market economy in China…. And also by introducing the private ownership which is a major feature of the capitalism economy structure, China’s private business sector began to develop and contribute majorly to the later economic development of China’ (Ricky, 2013). Therefore, the success of China could be said to have been contributed to its strategy to introduce the capitalism. Based on the USA and the European Union research it has showed that China has achieved a level of 73% marketization of its economy.