Question

is there a market failure related to palm oil production. If so, what is it?

Does it suggest the need for government?

Answer 1

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In the oil palm industry market failure can occur when efficient outcomes do not result from price mechanism, demand and supply forces do to certain issues and forces. Market failure is a fact of economic life in any society, but it tends to be more pervasive in developing economies. The market paradigm of development which has its roots in Adam smith ‘‘invisible hand’’ or get prices right is criticized by modern theory of market failures that recognize that information is never perfect and that markets are never complete. The theory of market failure is particularly relevant to developing countries because they generally suffer the problems of underdeveloped or missing and imperfect information. Market failure occurs when the competitive market system either (i) produces the wrong amount of certain groups and services or (ii) fails to allocate resources what so ever to the production of some goods and services whose output is economically justified.

In effective policies, Governance structures and management system relating to environmental and social (access to markets and fair prices) performance are perhaps one of the major problems to sustainable oil palm development at various levels; from Governments, international institutions and industry bodies down to individual oil palm companies. The role of the Government is regulatory and to create suitable investment climate. It is a common occurrence for Governments to be involved in the economies of their countries depending on their systems of governance. A state may wish to correct market failures of macro-economic inequity or undesirable outcomes that a pure market-driven system can sometimes produce.