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This question is based on The Economist Magazine's Schools Brief: State and Market - which has its own module in Etudes.

Government intervention to correct a market failure:

  A. has become more important as the damage of market failures has risen
  B. has diminished in recent years - which is a good thing.
  C. faces the problem of the regulators being captured by the industry they are regulating
  D. has diminished in recent years - which is a bad thing

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Related questions

1. Why Niall Ferguson thought that the expansionary fiscal policy (or government deficit) could produce crowding-out effect? You can explain by using the IS-LM model or you can use the logic of loanable funds theory.

Niall Ferguson believed that expansionary fiscal policy could produce a crowding-out effect. Ferguson believed that if the government tried to increase demand during the crisis it would cause the real interest rate to increase. He theorized that if the government tried to boost the economy through deficit spending it would cause the interest rate to rise, which in turn would crowd-out investors and consumers. The interest in the deficit would lead to an increase in the demand for loanable funds, which would lead to an increase in interest rates. Ferguson stated "The lesson of economic growth is very clear. Economic growth does not come from state-led infrastructure investment. It comes from technological innovation, and gains in productivity, and these things come from private sector, not from the state."

2. Why Paul Krugman thinks that Niall Ferguson was wrong and thought that government deficit could not produce a crowding-out effect? In other words, please explain Krugman's Liquidity trap .

Paul Krugman disagreed with Ferguson and believed that the government deficit could not produce a crowding out effect. Krugman's liquidity trap: Private demand is so low that even if the short-term interest rate is 0% spending is less that what is needed for full employment. Normal monetary policy of the central bank purchasing short-term debts with new money is ineffective. Krugman argues that a major issue during the crisis was people wanting to save money combined with the private sector being far less likely to invest. He referred to this a "savings glut". It was argued that the federal reserve was playing the part that the private banking system through buying private securities and the federal government was playing the roll that business wasn't by engaging in investment. Due to the liquidity trap excess demand for savings is not going to drive interest rates up. Krugman stated " Government borrowing gives some of those excess saving a place to go and in the process expands overall demand, and hence GDP. It does not crowd out private spending, at least not until the excess supply of savings has been sopped up, which is the same thing as saying not until the economy has escaped from the liquidity trap."

3. In the discussion, other discussants such as George Soros and Robin Wells pointed out some interesting issues. Please provide at least one thing that you agree and one thing that you disagree. Discuss in details why you think so.

I agree with Soros view that the publics view of the financial markets has been forever changed. " Financial markets namely that they tend toward equilibrium, and that equilibrium is disturbed by extraneous forces, outside shocks. But the finical system collapsed of its own weight." I feel like this is a situation in which it takes a very long time to build trust, but that trust can be lost instantly. The crash has challenged the felling of security that people once felt in the banking system. The idea of the market regulating itself is fading, it wasn't until the government stepped that people felt reassured in the banking system. I believe this will lead to a period of government regulation that wouldn't have arose without this change in view. I disagree with robin Wells' view that the US needs to shift towards protectionism. I believe that free trade is good for everyone as long as there is a comparative advantage. If the US moves toward protections as a result of the deficit it will slow economic growth and place us at a disadvantage compared to countries with free trade. Not to mention consumers in the US will be placed with the burden of higher prices on goods.

Please make comments to the discussion I provided above(at least 300 words). And you can start with "I agree with you on some points... But I disagree with you on some points".

Can the U.S. Postal Service be considered a monopoly in first-class mail? Why or why not?

Explain the barriers to entry in this market.

What has happened to the price elasticity of demand for first-class mail in recent years?

What situations in this market create price discrimination?

Below is the reference text:

The Mail Monopoly

The U.S. Post Office was granted a monopoly in 1775 and has operated under federal

protection ever since. In 1971, Congress converted the Post Office Department into a

semi-independent agency called the U.S. Postal Service, or USPS, which had total

revenue of about $70 billion in 2009. Because of the national recession, revenue in 2009

was down 9 percent from 2008 and about the same as in 2006. More than 650,000

employees at 37,000 post offices deliver an average of 177 billion pieces of mail a year to

144 million home and business addresses. This amounts to about 40 percent of the

world’s total mail delivery. USPS pays no taxes and is exempt from local zoning laws. It

has a legal monopoly in delivering regular, first-class letters and has the exclusive right to

use the space inside your mailbox. Other delivery services such as FedEx or UPS cannot

deliver to mail boxes or post office boxes.

The USPS monopoly has suffered in recent years because of rising costs and growing

competition from new technologies. The price of a first-class stamp climbed from 6 cents

in 1970 to 44 cents by 2010—a growth rate twice that of inflation. Long-distancephone

service, one possible substitute for first-class mail, is much cheaper today than in 1970.

New technologies such as email, ecards, online bill-payment, text messaging, and socialnetworking

sites also displace USPS delivery services (email messages now greatly

outnumber first-class letters). Because its monopoly applies only to regular first-class

mail, USPS has lost chunks of other business to private firms offering lower rates and

better service. The United Parcel Service (UPS), for example, is more mechanized and

more containerized than the USPS and thus has lower costs and less breakage. The USPS

has tried to emulate UPS but with only limited success. After Hurricane Katrina, it took

seven months to reopen the USPS processing and distribution center in New Orleans.

Rivals UPS, FedEx, and DHL all restored service within three weeks.

When the Postal Service raised third-class (“junk” mail) rates, businesses substituted

other forms of advertising, including cable TV, telemarketing, and the Internet. UPS and

other rivals now account for most ground-shipped packages. Even USPS’s first-class

monopoly is being threatened, because FedEx and others have captured 90 percent of the

overnight mail business. Thus, USPS is losing business because of competition from

overnight mail and from new technologies.

USPS has been fighting back, trying to leverage its monopoly power while increasing

efficiency. On the electronic front, USPS tried to offer online postage purchases, online

bill-paying service, and online document transmission service. But these new products

were scrapped as failures. Changing technology and competition have been eroding

USPS’s government-granted monopoly. USPS lost about $4 billion in 2009 and said that

without drastic changes, losses would total $238 billion over the next decade. Even a

legal monopoly can lose money. Proposed changes include postage increases and

dropping Saturday delivery.

Sources: Corey Dade, “Post Office Renews Campaign to End Saturday Mail Service,”

Wall Street Journal, 3 March 2010; Liz Robbins, “Postal Service Revives Cutback

Plans,” New York Times, 2 March 2010; “The Trap: The Curse of Long-term

Unemployment Will Bedevil the Economy,” The Economist, 14 January 2010; and the

USPS home page at http://www.usps.com.

Economist claim that terrorist attacks can be viewed as another type of trade barrier. Do you agree? Why?

After reading The African Business Journal article about Boko Haram in, "Boko Haram and its impact on the Nigerian Economy." Do you think this terrorist organization and it's action in Nigeria is having an impact on Nigeria's import/export industry (trade)?

If so, what type of affect do you think the terror group has on Nigeria's import/export business?

Boko Haram and its Impact on the Nigerian

Economy

By Angus Gillespie

Despite emerging from the murky shadows within Nigeria just a dozen years ago,

Boko Haram has quickly earned itself an infamous reputation for being one of the

most callous and violent radical Islamist groups in African history. In fact, it’s

already been tagged a terrorist group by western countries such as the United

States. Over the past 12 to 15 months, Boko Haram has unleashed a massive

wave of violence, fear and chaos throughout the northern African country – so

much so, that it’s know seen by many as having a noticeable impact on the way

the country operates, and by extension, is hindering its economic well being to a

widening degree.

Founded in 2002, Boko Haram is an ultra extremist Islamic cult focusing primarily

on the edict that Western education is forbidden. Military operations were

launched in 2009 to support their cause in creating an independent Islamic state.

It also has roots that can be traced to the northern part of Cameroon and parts of

Niger. The Boko Haram leadership has international connections to Al-Qaeda.

Suspected Boko Haram militants have killed dozens of Nigerians in recent weeks

and there is no sign of the violence abating. In one attack, gunmen disguised as

soldiers fired on a crowd in a church compound. The radical sect is known for

attacking churches, schools, and police stations. Tourists are also considered fair

game. Violence linked to the Boko Haram insurgency has resulted in an

estimated 12,000 killings since 2002, although that figure has gone up

considerably since 2009 when the group began to heavily arm itself as a militia.

Making matters worse for the Nigerian government of Goodluck Jonathan is that

some of the attacks come amidst reports some army generals have been aiding

the rebel militants, on the belief that a national coup is going to take place.

Nigerian media sources have reported that as many as 10 generals and five

other senior military officers have already been tried before the courts for

supplying arms and information to Boko Haram. However, at least one Nigerian

military spokesman called the reports “falsehoods”.

This contradicted Interior Minister Abba Moro said it was “good news” that the

army had identified soldiers who were undermining the fight against the

insurgents, and that it sent a strong message to other serving officers.

Boko Haram has waged an increasingly bloody insurgency since 2009 in an

attempt to create an Islamic state in Nigeria.

One small town that has been hard hit by the violence is Attagara, where the

village church came under attack leaving at least 20 people dead.

Nigeria’s government has been facing mounting pressure both at home and

abroad to do more to tackle the group and bring about the release of more than

300 schoolgirls kidnapped by the group on April 15.

President Jonathan originally declared a state of emergency in May of last year in

the three northern states where Boko Haram is, and has been, most active –

Borno, Adamawa and Yobe.

Boko Haram retaliated by stepping up its bombing campaign in cities and

launching mass attacks on small towns and villages.

Media correspondents in those regions say that since the infamous kidnapping of

more than 300 schoolgirls, the attacks have become an almost daily occurrence.

The campaign to free the girls that began in their home village has now gone

global, with the U.S., Canadian and British governments offering support to help

with the rescue. It’s believed about 55 girls have managed to escape their

captors since being taken hostage in April. The government has ruled out

swapping the girls for detained insurgents associated with Boko Haram.

President Jonathan has promised to address the poverty that helps fuel the

uprising — but only once the insurgency is put down. The World Bank says twothirds

of 170 million Nigerians struggle in poverty in Africa’s biggest oil producer.

Despite the fact there is so much poverty and lack of widespread education,

Nigeria remains Africa’s largest economy – thanks in large part to the massive oil

reserves that are often exploited by international corporations. That said, to put

things into perspective, only about 3% of the world’s oil supply is found in the

country. More recent successful business sectors have included the likes of

banking, telecommunications and a burgeoning film industry. Agriculture and

services have also been two traditional economic staples for the country,

although neither has shown much in the way of expansion over the past 10 to 20

years. To its credit, the country has also been diversifying the core economic

drivers away from energy and agriculture. The nation’s GDP is now $490 billion,

just shy of the economies of countries like Norway and Sweden.

When an organization managed to get the president of the country to declare a

state of emergency, it stands to reason it has the ability to unwieldy a

tremendous amount of damage on the country, be it through violence or

economic crippling.

Economic Impact

Since Boko Haram emerged from the shadows about four years ago, once armed

militarily, one of the first obvious economic concerns was the almost immediate

drop in foreign direct investment (FDI), with the concern being whether the

government had the wherewithal to deal with the serious insurrection and stave

off the many decades of political instability the country has faced. According to

the World Investment Report (WIR) 2013, FDI flows into Nigeria dropped by 21%

in just one year — from $8.9 billion in 2011 to $7 billion in 2012. The loss of $1.9

billion for a country in desperate need of money – such as Nigeria – was a

staggering blow.

The monumental decline in FDI over such a short period of time sent ripple

effects throughout the international community, creating a negative domino

effect. It’s a rock heading downhill that continues to gain momentum, and it will

be up to Jonathan and his government not only to slow it down, but to stop it

altogether, or it will begin all over again.

FDI into Nigeria has a direct impact on trade, while also ensuring progression of

economic development to the south. FDI inflow also supplements the available

domestic capital by stimulating the productivity of domestic investments.

Someone troublesome is the high codependency ratio between the inflow of FDI,

the Nigerian oil sector, and the country’s GDP.

A scientific study found that a unit increase in FDI into the Nigerian oil sector will

increase the country’s GDP by approximately 16 units. This shows that the

Nigerian oil and gas sector, which is the mainstay of the economy, has a high

rate of exposure to foreign direct investment.

Between the lack of jobs, and the increasing violence with the likes of terrorist

groups such as Boko Harm, there has been a mass movement of Nigerian

citizens looking to settle in areas not impacted by the violence. The trouble is

this: the areas not affected by the violence are most often areas that have

nothing in terms of sustainable economic activity that would allow a person or a

family to survive. Living in the dangerous regions is where there’s hope for

employment.

The rush to escape from the northern part of the country that has been hard hit is

already affecting the profitability of businesses in the region. It’s no reached the

point where accredited banks have begun closing down some branches due to a

huge decrease of economic activity. On top of that, a number of employees at

these businesses are demanding to be reassigned to areas that are less volatile.

As noted many times before, a lot of the current problems with terrorist uprisings

can easily be pinpointed to a lack of government leadership due to the constant

political insecurity, and especially so in the northern region.

Once the banks and other businesses decide to pack up and move elsewhere, it

leaves the region in a state of economic depletion, and one that won’t easily be

regained. It’s always quicker destroying something than it is building it up. The

people of Nigeria are hoping President Jonathan’s government takes drastic

action to bring about more stability in the country and soon. Or, it will be a long

road to recovery for a nation that can already ill afford this type of economic

setback.

More than $21 billion of foreign direct investment poured into Nigeria in 2013, up

28% from the year before. The country does not want to see that slide backwards

due to political instability and the onset of widespread violence. The country has

attracted the most foreign direct investment in sub-Saharan Africa since 2007,

according to Ernst & Young. But all of that could be quickly eroded if the violence

is not snuffed out.

Many financial analysts seem to be of the opinion that the impact on foreign

investment will largely be determined by geography. As example, investors may

pull out funding from manufacturing and infrastructure investments in northern

Nigeria, which has been ravaged by violence. But the resource rich southern

region has been spared from violence to this point. This could be one of the

factors as to why Nigeria’s stock market has been seemingly unaffected by all the

recent turmoil. The benchmark equity index has only declined about 1% since the

kidnappings in mid April; so for all intents and purposes, it has been business as

usual.

So just how bad is it in Nigeria? It is perhaps best summed up in a balanced

report by an analyst with Ernst & Young.

“Nigeria epitomizes this almost bipolar view of Africa,” says Henry Egbiki, West

Africa regional leader at Ernst & Young. “For many of us already doing business

on the continent it is an exciting, dynamic, high octane growth market; for some

others, often on the outside looking in, it seems chaotic, unstable, and uncertain.

The reality is obviously less cut and dried than either of these extremes.”

The next 12 to 18 months will be critical for the government and how it responds

to the upswing in violent outbreaks by radical groups such as Boko

Haram. Humanitarian groups and countries will be looking on from a human

rights point of view, but you can also bet that the international investment

community will be keeping a close watch as well.

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