An evaluation of the measures used by the private sector to correct market failure.

1. Private Sector
Intervention for
Market Failure
Prepared by Sandrea Butcher

2. • The private sector also attempts to correct market
failure.
• Four measures used include:
1. corporate code of conduct;
2. corporate social responsibility;
3. voluntary agreements;
4. corporate ethics.

3. Corporate Code of Conduct

4. • This is a company specific policy statement which
undertakes to set standards for the conduct of the
firm and employees.
• The standards include product safety and quality,
workers' rights and responsibilities and compliance
with local legislation or regulations.

5. • The presence of imperfect information means that the firm will
have greater knowledge about the product than the consumers.
• This knowledge includes inputs, the production process and
even testing.
• High production standards and provision of information will
reduce the market failure.

6. • The codes will have standards for marketing and
selling, safety of products, product quality as well
as compliance with government regulations and
environmental issues.
• The market failure caused by asymmetric
information will be reduced as consumers will
know more about the suppliers and their products.

7. Evaluation of corporate
codes of conduct

8. • Implementing codes of conduct may increase costs
and therefore negatively affect profits.
Costs
Profits

9. • Firms will pass on increased costs to consumers in
the form of higher prices in an attempt to maintain
profits.
• This will reduce consumer surplus.

10. • The codes and their implementation will depend on
the company.
• As time goes by, once the codes are enforced, sales
will improve, as well as market share.

11. • The public image will
improve, and can
generate customer loyalty.
• This positively affects
sales and can increase
market share.
• Rivals will attempt to
mimic or surpass the
firm.
• The consumer will
actually be better off.

12. Corporate Social
Responsibility (CSR)

13. • This refers to the deliberate inclusion of issues
pertaining to the wider society into the corporate
decision making process.
• Firms integrate social and environmental concerns
into their business operations and in their
interaction with the stakeholders on a voluntary
basis

14. • By acknowledging that they create negative
externalities, firms will put measures in place to
reduce negative externalities or sponsor activities to
increase positive externalities.

15. Examples of how firms practise CSR
• Providing ergonomic workspaces for employees with more
natural lighting to reduce consumption of fuels which are
fossil-based and also reduce injuries such as repetitive strain
injury and eye strain.

16. • Dispose of waste properly by adhering to industry guidelines
• Offering scholarships
• Sponsoring maintenance of public facilities like parks
Businesses in Barbados clean a kilometre of
the ABC Highway.

17. • Using recycled water for gardens and lawns.
• Clean up beaches and gullies.
Barbados Hotel and Tourism Association help clean
up Silver Sands Beach and Park, on 15th September
2012

18. Evaluation

19. • CSR improves the reputation and operations of firms.
• Vogel (2006) indicates that there are some signs that the market for responsibly
produced goods is growing.
• It thereby increases sales and with programs such as scholarships, can support
the disenfranchised in society.
• It also reduces the market failure caused by negative and positive externalities,
and merit goods like education and healthcare, by increasing the access to these
goods. More of us can go
to university

20. • Firms who are practise CSR will have higher costs.
• Production processes will be lengthened as greater
checks will be performed.
It has to
be
checked
again.

21. Voluntary Agreements

22. • With reference to market failure, these are legally
binding agreements between firms and regulatory
agencies/governments to reduce pollutants.
• Firms will gradually reduce emissions according to
agreed timelines and quantities.

23. • Inspectors will monitor the progress of the
reductions in the emissions and submit reports to
regulation industries.

24. Example 1
• A firm which uses fresh water to
cool its turbines on the beachfront
can adversely affect coral reefs
since hot fresh water can cause
corals to bleach.
• The firm can voluntarily agree to
have the water run off to a
catchment area where it will cool.
• A sluice gate can be installed to let
sea water in at high tide and after a
few days the water become more
brackish and can be released into
the sea.

25. Example 2
• A firm that releases CO2
into the atmosphere can
capture the CO2 and use
catalysts to make
polypropylene
carbonate, which can be
used to make coatings,
adhesives, foams and
packaging, all of which
are derived from
petroleum currently.

26. Evaluation

27. • Voluntary Agreements allow environmental
protection goals to be met at lower cost, in a faster
more flexible manner than traditional regulatory
approaches.
• Firms attempt to find creative ways to control
emissions which generates jobs and incomes.

28. • However, sanctions can be limited especially where
environmental protection measures can be delayed
for many years (for example, agreements with the
car industry to reduce CO2 emissions).
• Firms only adopt voluntary measures to avoid
costly government policies like taxation.
This is not good enough. The
inspector is coming next
week.

29. • There is also limited participation.
• Voluntary Agreements normally involved better-intentioned
brand owners who have a long term stake in the industry,
and who want to build consumer confidence.
• This leaves firms who have different practices and priorities
to be non-compliant.

30. Corporate Ethics
• Corporate Ethics refers to a standard of conduct by which a
company interacts with its employees, customers and
stakeholders.
• It provides a code of behavioural norms for employees.
• By applying the ethics, firms attempt to internalize
externalities as private costs will change.
• Corporate ethics have even been established in certain
sectors, such as law (Bar Associations).

31. Example
• A beauty products supplier will establish codes to
prevent scientists from testing products on animals,
as well as not use ingredients that are harmful to
humans.

32. Producers of fake cosmetics are
unethical

33. Evaluation
• Ethical behaviour improves relationships with
clients and can facilitate brand loyalty.
• It increases costs of operations which will be passed
onto consumers in the form of higher prices.

34. Impact on welfare of private sector
intervention
SMC
PMC2 = S2
PMC1 = S1
SMB = D
Q
P,C,B
QA Q1Q2
Private cost increase
Less output is
produced, so output
is closer to the
socially optimal level
Deadweight loss to
society is reduced