Causes of the Frequent Market Failure in Somalia
Market failure occurs when the quantity demanded by the consumers does not equate the quantity supplied by the seller in a given market. Such failure is recurrent because of the existence of the economic factors that prevent market to operate in its equilibrium. Market failures matters since optimal allocation of resources is not attained and social cost will be pretty higher than the benefits of production of goods and service.
Current economic system of Somalia can be referred to as libertarian anarchy, sometimes called to anarcho-capitalism. It’s an absolute no public intervention system as the public is none existence or unable to intervene natural law that runs the market. Free market entitles to a greater competition and supports private ownership so the efficient function of the market is not impeded. Regardless the type of the economic system, market failure is treated as a negative externality to be addressed to stimulate the social welfare. Economic theories tell us that market failure is caused by the monopoly and the negative externality. But, this is not always true in all the countries in the world. Market failure in Somalia is attributed to two main factors those are information externality and the learning externality.
Information Externality that Cause Market Failure in Somalia
Information externality refers the fact of that it’s easier to copy or imitate rather to invent or create. Negative externality is that the returns of the innovation spills over other firms in the market and Reduces the expected private returns of the given firm which in turn creates disincentive to innovate new product. Lack of the innovation raises the price competition, which in the long run leads prices fall behind the production cost. This phenomenon is known in the economics, a shutdown point where the firm exists the market and causes market failure.
The above scenario is overwhelming common in Somalis economy and new business is failed by the multiple contestants that enters the markets and cause prices to decline as a result of the supply glut. New entrants are motivated by the lower requirement of factors of production, relatively small fixed capital requirement and limited training needed.
Well known competition strategy in Somalia, is price competition in which all the firms set prices as low as possible to maximize their sales at the expense of the profit margins. As competition consolidates, weaker companies leave the market and spoil jobs market. Remnant firms develop monopoly power which is the worst benefits of the consumer
Information externality degenerates the market failure and in effect limits economic recovery that the country desperately needs. Although information externality is hard to contain by the state like Somalia, then, the only way out is to enforce intellectual property rights and fight with the counterfeits. This can be done through the ratification of laws of patents and copyright those grant monopoly power over an idea to its creator. To correct information externality that fails the market; government should require all companies to go through standard registration procedure. Government should adopt a strict policy against the Counterfeits and copies. Limited companies should be allowed to compete in a given market
Learning Externality That Leads Market Failure
Learning’s negative externality comes into existence when Colleges and education institutions are incapable of producing trained potential employees. Somali businesses need labors that can be trusted on the running business operations in a completely professional manner. Hurdle in Somalia is that, even if the educationally competent worker is acquired, he/she needs to be trained in the application of the technology that the business uses. Such technologies are imported from other countries and the reliance of the foreign engineers is inevitable. This makes the business to be inefficient in the production of the goods and service.
The main sources of the learning externality in Somalia, are:
Shortage of the skilled labor supply in the labor market, which raises real wage and increase production cost
A weak educational system that fails to produce the market required skills
Conflict between the traditional mind set business owners and the university graduates
Learning externality could be addressed to the development of the education system that train home grown professionals. Government support of the tertiary education is necessary so the universities will not depend on the students as a source of income.