Introduction
The economy consists of various aspects of the market such as specificity, forms of competition and development trends. These market arms are crucial in understanding the economic landscape within a country. Specificity argues that economic problems need viable solutions by analyzing the source of the problem as opposed to looking at the mere problem. Therefore, the government considers the cause of an economic distortion to allow it to deal with the issue effectively. The forms of competition analyzed include the monopolistic competition, the perfect competition, monopoly, and oligopoly. The paper has also discussed the development trends from an economic perspective. This study will assess the three features that are specificity, forms of competition, and the development trends. There will be illustrations to show the extent of applicability in the economies of various countries.
The Rule of Specificity
In economics, the rule of specificity states that economic problems need solutions by analyzing the source of the problem as opposed to looking at the problem. The primary justification for this rule is avoiding of externalities, which are undesirable consequences of an idea. Negative externalities provide a platform for the utilization of the rule of specificity. Broadly, negative externalities refer to the cost incurred by the third party resulting from an economic transaction. The first and second parties are the producers and the consumers, while the third party comprises of any organization, individual, or even resource, which experiences indirect influence. In some cases, the negative externality is an external cost. Some of the externalities arising from consumers include waste, while some externalities such as carbon emissions are mostly from the factories. The specificity rule supports the provision of intervention at the source of the problem. In this case, the policy tools used should be close to the source of distortion (Harris and Brian 500).
Over the years, the government has been providing concrete strategies to deal with the negative externalities. Some of the common externalities gaining significant attention globally are the environment-related external factors. The policies forwarded by many governments seek to challenge the consumers and producers to make decisions based on the appropriate environmental resource prices. Having the right environmental policies ensure that trade in different countries generates considerable benefits without necessarily jeopardizing the environment. Some of the external costs such as the pollution cost of the industrial production result in the marginal social cost curve outdoing the marginal private cost. The negative externalities also encompass the net welfare loss, which exists in two varying forms. Firstly, it occurs when a particular economic activity such as manufacturing of twenty thousand computers has a higher marginal cost as compared to the marginal benefit to the society. It can occur when the marginal advantage of a particular economic activity exceeds the marginal cost (Harris 3).
The government can reduce the social costs through regulation in various ways. Concerning pollution, the regulators can issue directives on the gasses emitted by the manufacturers. As such, the producers of these vehicles produce cars with fewer emissions as per the guidelines of the government. In other instance, the government issues directives prohibiting manufacturers from leaded petrol that leads to atmospheric lead poisoning. Another form of protection would be raising of the private costs of particular goods so that it meets the social costs to enhance the market equilibrium. Raising the private costs, in this case, would include increasing the taxes for goods that have externalities. For instance, the taxing of cars is on measures of their carbon dioxide emissions, which would make people prefer the cars that are less emitting. These are among the many specific policies provided by the government to counter a distortion relating to the environmental externalities.
Subsidies are also crucial aspects of the economy that help in gaining a deeper understanding of the specificity rule. The term grant is relatively familiar in the field of economics although its definition varies depending on the context. As commonly defined, the term subsidy refers to the various government policies that favorably affect the private entities' competitive position. These plans include a variety of interventions such as programs for workers education and procurement policies. The subsidies are crucial in promoting positive externalities especially on the services or goods generating spillover benefits. However, an economist uses the hypothetical market equilibrium to identify subsidization with the absence of the government. For example, the various classic economic models promoting a competitive balance do not involve any public sector. The involvement of the government in the expenditure and tax policies alters the output and equilibrium systems. Activities leading to the reduction of net returns are discouraged through taxation. Conversely, subsidization is evident when there is an encouragement for activities that have enhanced net returns. The concept of subsidy is only practical without the involvement of the government. The government engages in various taxation practices such as payroll, income, value-added, excise and capital taxes among others. Besides, the government participates in many regulatory programs imposing costs on the private entities of diverse nature that include environmental quality programs, occupational health and safety, and programs to support disadvantaged groups among others.
In most cases, the government imposes subsidies to help some of the consumers who might feel the impact of the high cost of goods indirectly. The government can use the subsidies constructively as a remedy to market failures. For instance, it is a challenge for people inventing socially valuable things to gain from the research and development, which depend on the nature of the efficacy and innovation of intellectual property protection. Competing sellers might copy the inventions and sell at a price that might not be for the inventors. Even with apparent market failures, some government programs benefit the private sectors that are congruent with the central purpose because the perception is that they are harmless. It is important for the government to analyze subsidies because some of them distort resource allocation. Some protective subsidies result to recipients expanding output and reducing prices. The grants are essential in protecting the domestic firms from any foreign competition. Nonetheless, economists argue that the protective subsidies hardly remediate market failure and lack distributional goals. In this case, these subsidies are economically undesirable. The subsidies protect consumers affected by production and sales of goods indirectly and therefore, they are essential government policies because they deal with the source of the problem (Sykes 7).
The management and the private security personnel souls understand the theory relating to effective policymaking and enforcement. The rule of specificity is therefore not limited to governments but can also apply to various organizations. In any situation, measures that are more specific are desirable, and they give an indication of the likelihood of success. In most cases, governments use prohibition, which is not sustainable. Prohibition is a non-specific policy, and in some cases, it leads to market distortions, the creation of black markets and difficulty in enforcement. Therefore, it is crucial to consider the specificity rule, which analyzes the externalities from the cause before establishing any policies.
Another application of the specificity rule is the infant industry argument. The argument postulates that the import competition prevents an uncompetitive domestic industry to start production. However, if the industry has protection from foreign competition, it can start production, lowering its production costs to gain a competitive advantage. When an industry reaches that stage, removal of protection can lead to public benefits presenting as producer surplus. In this case, a tariff would be relatively significant as opposed to doing nothing for the well-being of the nation. However, the specificity rule argues that a good government policy is the one that is acting directly to the root of the distortion. For instance, if the issue involves fostering the initial domestic production, a subsidy is the best government policy. Firms in the infant industries benefit more from the production subsidies because of the aspect of sustainability. Borrowing of funds from financial institutions or government loans would do more harm than good because it is not sustainable.
Illustratively, fighting drugs in a country through application of the specificity rule would involve stopping the entrance of the drug. The entry of narcotics in the country is mostly the cause of the problem. Therefore, the government should consider tightening the security at the airport and other entry points. There should be deportation of foreign drug dealers and banning them from the country. Notably, strategies such as establishing rehabilitation centers fail in addressing the source of the problem. As such, cases of drug dealing would continue to escalate. It is, therefore, imperative for the government to establish policies that deal with the cause of various problems. This strategy prevents a situation from affecting third parties and therefore it is more appropriate than other economic ideas that fail to consider third parties. The specificity law is, therefore, crucial in dealing with financial problems that might cause social and environmental issues to other individuals.
Forms of competition
In economics, various forms of competition include the monopolistic competition, the perfect competition, monopoly, and oligopoly. The Monopolistic competition refers to the imperfect competition found in many of the real-world markets. Edward Chamberlin and Joan Robinson were economists who identified the monopolistic competition as part of the market structure in the 1930s. Many of the small businesses have their operations based on monopolistic competition including the restaurant and high street stores owned independently. For instance, the restaurants compete for the same customers, but they provide something different with an element of uniqueness.
Various features are characterizing the monopolistically competitive markets. Firstly, each of the company is independent in making decisions regarding the output and price based on its production cost, market, and the product. In monopolistic competition, the knowledge among participants is widely spread, but it is not perfect. For instance, the availability of menus in a different restaurant helps the diners to review the meals. However, they can appreciate a restaurant after dining, feeling contented with the meals, and the services provided. In this type of market, the entrepreneur has a bigger role to play as compared to the entrepreneurs in a completely competitive market because there are more risks, especially in decision-making. Another notable feature in the monopolistic competitive market is the freedom to enter a market or leave because of the limited barriers. One of the central characters of monopolistic competition is the differentiation of products. The main types of differentiation include the real product differentiation, marketing differentiation, human capital differentiation, and the differentiation through distribution. Another feature characterizing the monopolistic competition is the downward demand curve. Firms make their product unique and therefore they can charge higher or lower hoping to compete with the rivals. While the industry prices act as a guideline, the firm sets its price individually. In monopolistic competitions, companies engage in advertising. The need for advertising is because of the increase in competition with other companies offering similar services or products. The advertising helps potential clients to know the differences between the products or services and therefore, firms advertise through the local press. Finally, the monopolistic competitive markets focus on profit maximization because of the active involvement of the entrepreneurs in managing their businesses (Hunt 78).
The monopolistic competitive firms are standard in the industries that support differentiation. Examples of these monopolistic competitions include the consumer services, the restaurant business, specialist retailing and the hotels and pubs. There are several benefits of monopolistic competition. These advantages include the limited barriers to entry that make the markets considerably contestable. The differentiation evident in the monopolistic competition creates choice, diversity, and utility. Therefore, consumers have a variety of options as they make decisions. The monopolistic market is dynamically efficient, especially in its production processes. There are also setbacks to monopolistic competition. Firstly, the aspect of differentiation is not necessarily useful in creating utility; instead, it promotes unnecessary waste. In the long and short run, the price is beyond marginal costs in a monopolistic competition and therefore, there is an allocative inefficiency. The graph below shows the allocative inefficiency in a monopolistic competition within the long and the short run.
In this form of competition, mass production is a challenge and therefore there an excess capacity. This situation shows the increase in productivity inefficiency within the firms. Nonetheless, there is outweighing of this setback the apparent advantages of the market especially choice and diversity.
The perfect competition is another form of competition that produces the best outcomes for the society and the consumers. In this market, competition is at its greatest level. They are several primary characteristics that are common in the perfectly competitive markets. Firstly, there is a limited role of the entrepreneur because of the knowledge freely available to all the participants. This perfect knowledge minimizes risk-taking. Secondly, there is the making of rational decisions in perfectly competitive markets because of the excellent experience evident among the consumers and the producers. As such, manufacturers use the knowledge to maximize their profits while consumers seek to increase their utility. Thirdly, the perfectly competitive markets have no entry or exit barriers, a feature that is similar to the monopolistically competitive markets. The fourth characteristic is the production of output units that are identical and homogeneous, without branding. The individual units are also homogenous. Another important feature of the perfect competition that contrasts the monopoly competition is the influence of market price. Primarily, a single firm in this type of competitive market cannot affect the market conditions or the market price. A single company derives its estimates from the particular industry. As such, it lacks the liberty to increase or lower its prices.
The perfect competitive markets also have many firms because of the lack of entry barriers. The role of the government in the perfect competition is making markets more competitive. There is no need for government regulation because there are no externalities. Following the features of the perfect competition in the economy, there are substantial advantages. One of the benefits is that there is no information failure in perfect competition because of the existing knowledge that is common amongst all the participants. Secondly, there is no derivation of monopoly power because there are no barriers to entry. The third advantage is that there are only average profits and therefore producers are responsible for their opportunity costs. Unlike monopolistic competitive markets, manufacturers do not need to spend their money advertising because the consumers have perfect knowledge and firms can sell all their produce. Besides, the goods are unbranded and therefore, it is impossible to strategize an advertising campaign. The two most significant maximum possibilities consistent with a perfect competition are the economic welfare and consumer surplus. The productive and allocative efficiency are at maximum levels. The consumers also have an advantage because they have a maximum choice.
While the perfect competition model provides substantial benefits to both the producers and the consumers, its applicability in the real world is relatively limited. The industries hardly compete perfectly. Instead, firms in any industry try to differentiate their services or goods so that they provide unique products. Besides, behavioral economist questions the assumption held in the perfect competition that consumers and producers act rationally. Notably, when the producers or consumers face a complex issue, the decision-making might not be rational. Instead, the decisions are prone to bias and subject to experience. While to some extent the perfect competition is unrealistic, it is relevant to some commodity markets such as tea and coffee. In other markets in the manufacturing industry, the model provides an essential yardstick that regulators and economists can use to evaluate the competition levels existing in the real markets.
A monopoly competition is a market structure that has a single seller who sells a unique product. In a monopoly market, the seller faces no form of competition because he is the only seller of the product and there are no close substitutes. In such a market, factors such as copyright and patent, ownership of resources, government license, and the high cost of starting make a particular entity be a single seller. These factors restrict other vendors from entering the markets. The monopolies have some information that is not common to other sellers. As such, these cartels control the market and the pricing. Achieving a monopoly is through some basic mechanisms; first, there is the introduction of a new product, in which the monopolist is the only one able to make the product because of the existing barriers such as the knowledge and skills required. Secondly, the current industry starts off with several competitors, but with an increase in competition, most of the firms are driven out of business and, only one firm remain or a group of sellers who join to work together. Besides, the monopolists construct high entry barriers to prevent new entrants from the market. The third aspect is the involvement of the government where it decides to grant the companies the exclusive rights to make productions for specific markets (McKenzie and Dwight 54).
Monopolies have the potential to determine their profits because they have unlimited power that the other industries lack, which is establishing the price of their products. In most cases, the primary goal of the monopolies is earning the most revenue. In this case, the price set by the monopolist is the one leading to the highest revenue. The graph below represents a demand curve in any monopoly market.
In the diagram, the highest price represented by $10 is the charge for the product provided. Depending on the quantity, the revenue earned is high. The monopolies harm the consumers through having high markups and making the products less available for consumers. The damage brought about to customers results from the monopolies' market power, which include lacking competition and setting markup independently that gives them the desired profits.
An oligopoly refers to the market structure that has a few dominating firms. A highly concentrated market relates to a market shared between relatively few companies. While only a few firms are in dominance, there are other small enterprises within the market. For instance, some airlines such as the British Airways have few competitors. However, other small airlines offer the same services albeit in small scale. Concentration ratios are essential for the identification of oligopolies. These concentration ratios measure the various proportions of the total market share that is under the control of a few firms. Given a high concentration ratio within an industry, economists term it as an oligopoly.
The essential characteristics for oligopoly include interdependence, strategy, and entry barriers. The firms are interdependent, and therefore the decisions made should reflect the other main competitors. In this case, the game of theory is critical in appreciating the concept of interdependence. The strategy is another important feature in firms that are interdependent. Companies need to plan actions based on the anticipated reaction from their rivals. Some of the strategic decisions made by oligopolies include choosing whether to collude or compete with rivals, to lower prices or to keep them constant or whether to implement new strategies or to observe the competitors' actions. There are first and second mover advantages and the few competing rivals seek to maximize the profits. Barriers to entry are a feature characterizing oligopolies. The oligopolies strive to maintain their dominance within a market because it is costly for the potential competitors or rivals to enter the particular market. The oligopolies can erect the barriers to entry deliberately or in some case exploit the natural barriers existing.
While oligopolies are imperative in promoting national income, they have several disadvantages. One of the main criticisms of oligopolies is the high concentration, which reduces consumer choices. Besides, this type of competition can result in reduced output and high prices. Another setback is that oligopolists lack competition and therefore, they are likely to engage in consumer manipulation especially when making financial decisions. Additionally, there are some deliberate entry barriers preventing other firms from entering a market. In this type of market, there are potentials of losing economic welfare. Following the disadvantages of oligopolies, it is clear that they are productively and actively inefficient. The diagram below presents the inefficiency of the oligopolies competitive market (Baumol and Alan 257).
Besides the obvious setbacks related to the oligopolies competitive market, there are some obvious benefits. Firstly, the adoption of a high competitive strategy by the oligopolies helps to generate similar benefits consistent with those of other competitive market structures including lowered prices. In term of innovation, process, and product development, oligopolies are dynamically efficient. The price stability of the markets provides substantial advantages to the consumers within the macro economy because they can plan. Therefore, the oligopoly has its distinct advantages and disadvantages in the economy.
Development Trends
Economic development refers to the creation and the sustenance of wealth. Some of the indicators of economic development include the creation of new jobs, maintenance of the existing jobs and improvement of the standards of living. Economic development happens when there is an increase in the standards of living. It is also consistent with the actual increase in the household income. The improvement in the evenly distributed income is also in line with economic development. The process of economic development thrives through the establishment of a skilled workforce, investing in physical infrastructure, improvement in the businesses, environment maintenance, improvement of the quality of life and promotion of the region and economy. There have been various development trends affecting the economy directly or indirectly.
In the recent decades, there have been significant changes in the global economy and especially in the area of development economics. One of the common developmental patterns in these countries is the gradual shift from the labor-intensive industries such as footwear and textiles towards higher technology sectors like the telecommunication equipment and electrical machinery. The newly industrialized economies serve as a development model for the less-industrialized countries besides competing with the old industries. There has been an evident flow of technology, investment, and management to the countries as they search for natural resources, skilled and disciplined labor, and market access. Some of the industries that have migrated to the newly industrialized countries include shipbuilding, textile, mining, steel, and electronics. This process has generated considerable research suggesting that there have been strong trends in the research in economic development. The areas of development include globalization, information and telecommunication technology, foreign direct investment, investment in education, inequality, investigation, and training, increased interregional trade and outsourcing among many other forms of development (Heshmati 4).
Globalization is one of the developmental trends that have considerable impacts on economic development. Globalization refers to the social, political, technological, and economic links in different states. The effects of globalization on the world economic are evident in the global markets. The expansion of the global markets helps in the liberalization of economic activities dealing with the exchange of funds and goods. With the removal of trade barriers on borders, global markets have become more feasible. There has also been an increase in the involvement of international institutions such as the United Nations, the World Trade Organizations, the International Monetary Fund, and the World Bank. These organizations help to regulate the relationship between the countries and the issues concerning politics, human relations, and justice. Organizations such as the World Trade Organization contribute to uniting the world trading systems. As such, globalization allows the international agencies to have an active involvement in the economic development of different countries.
Historically, the United States and has been the leading economic giant, but with the advent of globalization, countries such as China have challenged the position of America in economic growth. Foreign direct investment is a crucial indicator of positive economic development. Investment such as capital right, lands, factories, and inventories are the real investments. Parent companies should have high foreign direct investment so that they influence the host country economically. Globalization has led to changes in the corporation. In this case, it is necessary to utilize the information technology skillfully and innovatively. This aspect has affected multi-national companies significantly. The advent of globalization was consistent with technological development. Development of technologies such as wireless technologies, the internet, undersea fibers, telephone, and the global technical infrastructure has been essential in moving information across borders. This development has been instrumental especially in implementing laws concerning Copyrights, international agreements, and patents. It is also easier to detect frauds within the international trade (Akram et al. 294).
There are various factors affecting economic development trends include major market forces, the international effect, the participant effect, supply and demand effect, and the bottom line. The market forces shape long-term economic trends and provide information on the reasons some patterns develop and future predictions. These major factors include governments, international transactions, speculation and expectation and finally supply and demand. Another factor is the general effect, which focuses on the balance of payments, international operations between countries, and the economic trends that are difficult to gauge. Nonetheless, these factors play a considerable role in various markets. For instance, the value of currency in a country determines the success of a firm within the country. The participant event is another factor that shows when people agree on a particular direction; the market can enter in a trend that could be self-sustaining for numerous years. The supply and demand as a factor affect the companies, individuals, and financial markets wholly. In some markets, the physical product determines the supply. Notably, dwindling supplies affect the prices of items as participants try to outbid each other to gain a finite amount of the product. Suppliers provide the commodities at a higher price, and the high demand prompts buyers to pay more for a product. These factors are crucial in understanding the development trends in the economy of a country.
Conclusion
The factors revolving around specificity, competition forms and development trends are essential in understanding the economic growth within countries. The specificity rules base its arguments because the government should provide policy solutions based on the cause of the problem as opposed to dealing with the problem. The specificity rule has been instrumental in addressing environmental externalities and other costs facing the third parties. The contribution of the government has also been evident regarding providing subsidies that have protected producers and consumers. Specificity is, therefore, a valid principle in preventing various forms of harm to third parties at the onset of an economic transaction. Nonetheless, there are limited scholarly works on the specificity rule. The competitive forms are widely discussed in different sources. The known forms of competition are a perfect competition, monopoly, monopolistic and oligopoly competition. The various types apply in different markets, and therefore, it is important to understand their diverse features within an economy. Finally, the development trends are evident in any economy and some of the factors notable in these patterns include major market forces, the international effect, the participant effect, supply and demand effect, and the bottom line. These factors are important in analyzing the economic growth of a country. Therefore, economic policy makers should strive to understand the different market arms so that they can make well-informed policies.
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