Assignment on Market Imperfections in Bangladesh & Its Solution [Md. Abdur Rakib]


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Assignment on Market Imperfections in Bangladesh & Its Solution
(Based on the study of Marketing Management). It prepared by Md. Abdur Rakib...

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Assignment on Market Imperfections in Bangladesh & Its Solution [Md. Abdur Rakib]

  1. 1. AssignmentOnMarket Imperfections in Bangladesh & Its Solution(Based on the study of Marketing Management)
  2. 2. 1AssignmentOnMarketing Management (Course: 511)Topic: Market Imperfections in Bangladesh & Its SolutionPrepared for:Dr. Belayet HossainProfessorDepartment of MarketingFaculty of Business of StudiesUniversity of DhakaPrepared by:Md. Abdur RakibRoll No: 041Section: ADepartment of Marketing (14th)University of DhakaDate of Submission: 26thNovember, 2012 eng.
  3. 3. 2What are the major causes of market imperfections in Bangladesh? How canthis be solved? Apply your judgments.Market Imperfections:Market imperfection is a concept describing when the allocation of goods and services by a freemarket is not efficient. That is, there exists another conceivable outcome where a marketparticipant may be made better-off without making someone else worse-off. Marketimperfections can be viewed as scenarios where individuals pursuit of pure self-interest leads toresults that are not efficient – that can be improved upon from the societal point-of-view. It is thefailure of a market to provide the socially optimal output. The entire market system provides asub-optimal mix of goods and services. The information is not quickly disclosed to allparticipants in it and where the matching of buyers and sellers isnt immediate.An understanding of market imperfections and its sources is important because these are thecases under which government intervention into the market is potentially justified on economicgroundsMarket imperfections are often associated with information asymmetries, non-competitivemarkets, principal–agent problems, externalities, or public goods. The existence of such situationis often used as a justification for government intervention in a particular market. However, sometypes of government policy interventions, such as taxes, subsidies, bailouts, wage and pricecontrols, and regulations, including attempts to correct market problems, may also lead to aninefficient allocation of resources, sometimes called government failure. Thus, there issometimes a choice between imperfect outcomes, i.e. imperfect market outcomes with or withoutgovernment interventions.
  4. 4. 3Market Imperfections in Bangladesh:Imperfections in rural labor markets, particularly interlocking of labor markets with land, credit,and product markets, has traditionally been viewed as a crucial constraint on income andemployment of rural labor households. For least developed economies like Bangladesh,challenges to domestic policies arise from multilateral, regional and bilateral ... The globalmarket imperfection further skews the trade gains on account of supply side constraints,resources and so on. Credit market imperfections, the degree of imperfection has declined overtime as rural credit has been made more readily. Growth patterns for children in landlesshouseholds were influenced by credit market imperfections. Labour market imperfections needto be seen in the context of product market imperfections. In country like Bangladesh structuralweaknesses and market imperfections inhibit the free play of market forces.
  5. 5. 4Major Causes of Market Imperfections:1. Monopoly Power:Monopoly results in a smaller output and a higher price when compared to perfectcompetition. Less than the socially optimal output is provided. The deadweight or social lossis due to monopoly. This deadweight loss is simply the excess of value over cost for thoseunits that would be produced under perfect competition but are not produced because ofmonopoly. Bangladesh has not only lost their monopoly in the world market but are alsofacing strenuous situation. Moreover, the problems revolving around the jute trade isassuming alarming proportions for Bangladesh in the recent years. There have been aproblem related to raw materials, finance and product demand/market. Due to poortransportation or monopoly distribution, resources are unavailable or inaccessible.Causes ofMarketImperfectionsMonopolyPowerExternalitiesPublicGoodsInequityDeregulationGlobalizationInformationAsymmetries
  6. 6. 5Traditionally, imports of food grains in Bangladesh have been the domain of publicmonopoly.2. Externalities:An externality is produced when all of benefits or costs of an economic decision do notaccrue to the decision maker. Someone makes a decision and someone external to thatdecision is affected. An externality can be positive so that someone external to the decisionbenefits or an externality can be negative so that a cost is imposed on someone who is not aparty to that decision.External costs in consumption generate passive results. External cost in production such asenvironmental pollution in Bangladesh is generated mostly in the production of many goods.3. Public Goods:The distinguishing characteristic of a public good is not the sector that provides the good.Some public goods are provided by the private sector and many private goods are providedby the public sector. National defense services of security, TV or radio broadcast, highways,libraries and parks are example of public goods.Considering Bangladeshs history of tumultuous politics, the country is gradually improvingin terms of political stability and governance. Unfortunately, development has not beenstable, mainly due to political will and commitment. Democracy and governance inBangladesh, still plagued by violence, corruption, outdated laws, abuse of human rights,absence of rule of law, non-accountability, and heavy politicization of all governmentinstitutions including the judicial system. It is observed that we need strong politicalleadership with commitment to fight against deep rooted corruption, non-accountability, non-transparency and inefficiency is imperative for establishing good governance and to ensuresustainable development. Keeping all these issues in consideration, this research paperdiscusses governance and good governance related issues and sustainable development. Italso provides a set of recommendations based on this analysis. The study is explanatory innature which is based on extensive literature review and secondary sources.
  7. 7. 64. Inequity:If the underlying income distribution is inequitable then the market distribution of goods andservices will also be inequitable.Regional inequity is a growing concern in Bangladesh. Bangladesh during the pre-independence period experienced serious regional inequity. Policy actions to address regionalinequity require information about the nature, extent and trends in regional inequality. Anattempt is made in this paper to analyze regional inequality in Bangladesh. Regional inequitymay be analyzed on issues related to growth, income inequity and poverty.There is variation among districts in terms of growth in agriculture and total GDP. Resultsindicate that level of agricultural growth and share of non-farm household in the district havesignificant contribution to the overall growth of the district overall growth of the economy ofBangladesh depends to a large extent on the performance of its agriculture sector.Agricultural growth depends on the growth rates of its subsectors. Growth rates in servicesector of the district also have positive and significant effect on the level of agriculturalgrowth. Human Poverty Index (HPI) has significant negative impact on agricultural growthindicating that districts with high human poverty (in other words low human capital)achieved lower level of agricultural growth.Share of income from agriculture to the total income has declined over time but share ofbusiness and commerce and professional wages and salary has increased (Table 22). In ruralareas also share of income from agriculture declined and share of non-farm income sourceshas increased over time.Higher the level of initial income, higher the level of current per capita income and higherGDP growth, higher per capita income in the district. Proportion of landless household had asignificant negative effect on per capita income level. This is quite obvious due to the factthat districts with large number of families (with most production income generating asses,land) had lower level of per capita income. One implication of these findings is that to raisethe average income level of this negative and particularly for the landless community.Government must take actions so that less endowed people can have greater access to newproductive assets such as solar dryer, power tiller, power pump, harvester, thresher, etc.
  8. 8. 7Bangladesh would require allocation for development projects so that less fortunate caneffectively take advantage of those. The issues of access to new productive assets are alsoimportant to this end.5. Deregulation:We have few deregulated industries such as a few financial sectors, electric utilities etc. Theimpact of trade liberalization and of market deregulation in general, on the performance ofagriculture remains contentious and empirical issue in the literature. Due to de regulationthere is an outcome of growing concerns around the world about the prevailing inefficienciesin agriculture and agribusiness and the need to improve productivity, profitability, andfinancial sustainability of agriculture and agribusiness by privatizing state- owned enterprisesand eliminating unnecessary government regulations.6. Globalization:The forces of globalization have produced rapid social change, often marked by more inter-and intra-regional disparity, environmental and ecological crisis, social disintegration,violence and conflict. In other words, for many poor countries the forces of globalizationhave produced enormous social suffering. Other local factors, such as, population increase,further aggravate the magnitude of social suffering. In the case of Bangladesh, the problemsof landlessness, impoverishment and consequent rural out-migration are compounded byenvironmental hazards as well as environmental degradation caused by economic and otherdevelopment activities. Natural hazard induced population displacement is endemic inBangladesh. One specific and central impact of globalization is the massive turn to a wage-labour economy.Trade liberalization and privatization created social insecurity and aggravating,unemployment, underemployment. Most of the privatization and closure of industriesresulted in huge retrenchment. Fall in the aggregate demand for labour has accelerateddeclination of wage. Real wage declined due inflation and currency market deregulationit is difficult for them to keep up the competitive advantages compared to imported goods.Inequalities increased in the country during the period of rapid globalization.
  9. 9. 87. Information Asymmetries:Information asymmetries are important in theory but difficult to identify in practice. Weestimate the empirical importance of adverse selection and moral hazard in a consumer creditmarket using a new field experiment methodology derived from theoretical models. adynamic repayment incentive that extends preferential pricing on future loans to borrowerswho remain in good standing. These three randomizations, combined with completeknowledge of the Lenders information set, permit identification of specific types of privateinformation problems.
  10. 10. 9Solutions to Market Imperfections:1. Monopoly Power:Monopoly power can be solved the following ways. Making the monopoly more competitive– antitrust policy: The antitrust laws allow thegovernment to prevent monopoly by preventing anticompetitive mergers. The lawsrestrict behavior that is deemed to be anticompetitive. Regulating the behavior of the monopoly: Price regulation is commonly used to addressthe problem of natural monopolies such as water and electric companies. Public ownership: The incentive structure can impacted by public ownership2. Externalities:The problems of externalities can be resolved the following ways: More completely defined property rights: In the case of an external cost, imposing a perunit tax equal to the amount of the externality will correct the problem. Subsidies or taxes: Rather than subsidizing the consumer, a subsidy to the producerwould work. A tax on either side of the market will work.3. Public Goods:The market can sometimes solve the free rider problem, allowing market provision of thepure public good. But the good is likely to be under provided often no provision would occur.In the case of an excludable public good, those who don’t contribute will generally beexcluded if the good is provided by the private sector. Because the marginal social cost ofextending the benefits to another person is zero, this is inefficient.4. Inequity:The attempt to address inequity through the market system may cause more problems than itsolves. The government must now address the surplus. An equitable distribution of resourcesmay require more than income transfers. Merit Good- a good or service to which society
  11. 11. 10deems everyone is entitled in some amount. Government intervention may be required toensure that these standards are met. Following are some solutions: Analyze the nature, extent and trends in growth, poverty and income inequality inBangladesh. Examining & exercising relationship between economic growth, income inequality andpoverty in Bangladesh. Provide some policy suggestions to foster growth, reduce income inequality and povertyin Bangladesh.5. Deregulation:The efficiency differentials are largely explained by farm size, infrastructure, households off-farm income and the reduction of government anti-agricultural bias in relation to trade anddomestic policies. The implication of these results suggests the need for further policy reformto augment productive efficiency.6. Globalization:Voice of the common workers, collective awareness and participatory management of tradeunions at various levels are the three main processes for the improvement of trade uniongovernance. The existing practice of centralized governance of trade unions has largelycontributed to the major failures in the labour processes in Bangladesh. The Governmentshould encourage and promote the conditions for social dialogue at the enterprise level as anincreasingly more important part of a dynamic industrial relation system. Increasing mobilityof goods and capital allows such obstacles to be readily circumvented, thereby prompting thetrade union movement to adopt a global approach.7. Information Asymmetries:Theoretical models of private information, and thereby permits identification of unobservableselection and moral hazard effects. The improvements of telecommunication industry canhave a great impact to resolve the information asymmetries.
  12. 12. 11Conclusion:In Bangladesh, the increase in domestic prices was substantial, but still less than the increase inworld prices; the explanation here is that net exports for Bangladesh are bound at zero due tomarket imperfections. Deregulations, privations, monopolistic situation, poverty, unequaldistribution of income etc. are influencing the market situations a lot. Besides, political unrest,globalization, rapid information flow are also having a great impact on its economy and thuscreate market imperfections. Government as well as the firms must come forward to solve thisproblem as quickly as possible to develop our economy. Government intervention is itself costly& may not be worth it. The solution may be politically infeasible. However, the solution must beimplanted to have an impact.