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NATURAL UNEMPLOYMENT: The combination of frictional and structural unemployment that persists in an efficient, expanding economy when labor and resource markets are in equilibrium. Natural unemployment exists when the economy is at full employment, which for practical purposes is defined as the condition in which the quantity of resources demanded is equal to the quantity of resources supplied. Most important for policy purposes, natural employment exists with stable prices, that is, no inflation.
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                           FIFTH RULE OF IMPERFECTION: The fifth of seven basic rules of the economy, stating that the real world is not perfect, especially in terms of achieving an efficient allocation of resources. This rule means that markets often fail to achieve due to market failures, and that governments seldom satisfactorily enact the policies needed to correct market failings. As such, the real world is often faced with the lesser of two evils--imperfect markets or imperfect government. This rule stems from the observation that the real world is populated by imperfect humans. These imperfect humans make imperfect decisions when participating in imperfect markets or when part of imperfect governments. The result is that the real world is, at best, only able to approximate the theoretical ideals of economics. The challenge is to recognize the imperfections and seek a balance that achieves the best possible outcome.Market ImperfectionsTwo notable problems in the market category of imperfection are market control and externalities.- Market control comes about when one side of the market has relatively more ability to influence the market exchange process, especially determining the price, than the other side. Such control typically results from the lack of competition. Monopoly is one noted example of market control exerted by the selling side of the market. Monopsony is a counter example of market control by the selling side.
- Externalities are a market imperfection that result because the cost or benefit of a market exchange affects people with no direct involvement. These costs or benefits are, in other words, external to the market. Pollution is a typical textbook illustration of an externality. The market for chemicals is based on decisions made by chemical users (buyers) and chemical producers (sellers). However, if waste products from the production of chemicals enter the environment, causing problems for local folks who breath the air or drink the water, then the result is a cost external to the market..
In both examples of market imperfections, the market fails to efficiently allocate resources. Government intervention is required to achieved efficiency.Government ImperfectionsUnfortunately, this fifth rule of imperfection also applies to government. While government is often looked to as the solution to market failures, it too is flawed. Four key government failings are special interest groups, apathetic voters, vote-seeking politicians, and bureaucratic inefficiency. Special interest groups, apathetic voters, and vote-seeking politicians guarantee that government leaders do not necessarily enact the best, most efficient economic policies. Then complex bureaucracies tend to prevent the chosen policies from being implemented correctly.It is a sad, imperfect world in which we live. However, the biggest failing is to naively expect perfection to emerge from this hodge-podge of imperfection.
Recommended Citation:FIFTH RULE OF IMPERFECTION, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: October 30, 2024].
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