Government Regulations

and Market Failure

Lecture Series on Managerial Economics

Prepared by Elizabeth R. Bajit, Ph.D.
CBAA, CLSU
At the end of this lecture, you should be able to:

discuss the microeconomic, macroeconomic and distributive

roles of the government
explain how the government corrects market failures by
undertaking regulations
provide some examples of legislations related to correcting
market failures, reducing negative and promoting positive
externalities
explain what is public good and what is meant by non-rival and
non-exclusive characteristics
provide some examples of public goods
 The Need for Government Regulations

The markets provide various goods and services. However, there are
things that the markets cannot guarantee such as safe streets, clean air,
national security, product safety
This is where the government comes in to provide what the markets
cannot provide. It is the government that implements protection of
property rights. The government enforces contracts between parties and
resolves issues between them
The government legislates laws to ensure open competition and provide
consumer protection
The government also provides public goods which are not provided by the
markets because of their inherent characteristics
 Microeconomic, Macroeconomic and
Distributive Roles of the Government
Microeconomic Role:
The government provides public goods, undertakes investments, and
regulates the operations of the private markets.

Macroeconomic Role:
The government conducts fiscal and monetary policies to reduce the
severity of economic recessions, manage inflation, reduce unemployment,
and promote economic growth.

Distributive Role:
The government implements means and ways to reduce the income
inequality, ensure minimum access of the poor health, education and other
welfare systems to improve the living standards of the people particularly
the less privileged.
 The Microeconomic Role of the
Government and the Market Failure
Two Main Roles of the Government:
1) Regulatory role to correct market failure and improve production and
consumption efficiency (impose taxes, provide subsidies, regulatory
standards)
2) Provision of public goods which cannot be provided by the private markets
Regulatory Role of the Government
1) To promote competition, the Philippine government enacted the Philippine
Competition Act in June 2015. It was signed into law in July 21, 2015. In May 31,
2016, the implementing rules and regulations (IRR) of the Competition Act were
signed, adopted and promulgated by the Philippine Competition Commission
(PCC). The Rules of Procedure of the PCC were approved on September 11,
2017 and became effective on September 30, 2017.
 The Philippine Anti-trust Law

The Philippine Anti-trust law prohibits anti-competitive

agreements. Considered as illegal are agreements between
and among competitors which restrict competition with
respect to price and other terms of trade, fixing prices at
auction or any form of bidding, controlling production, markets,
technical development, or sharing or dividing the markets.
Included as violation are the abuses of dominant position in the
market restricting competition.
The World Competitiveness Report 2021

The Philippines ranked 52nd out of 64 countries in the World

Competitiveness Report 2021. It ranked 45th last year.
Switzerland topped the overall ranking. Singapore ranked the
highest among the Asian economies ranking 5th place
overall. The Philippines ranked 13th out of the 14 Asia Pacific
economies. The ranking is done by the Institute for
Management Development (IMD), a Switzerland based
business school. The ranking is based on economic
performance, government efficiency, business efficiency
and infrastructure.
 Ranking of Selected Countries in the World
Competitiveness Report 2021

Source: Business World (2021, June 18). Philippine slumps to lowest competitiveness ranking in 5 years
 The Anti-Red Tape Act
Part of the 10 point Agenda of the Duterte Administration’s ”Ambisyon
Natin 2040” is to promote competitiveness in the country.

To improve the regulatory environment to promote the ease of doing

business in the country is the enactment of the RA11032 which created the
Anti-Red Tape Authority (ARTA)

ARTA aims to promote integrity, accountability, proper management of

public affairs, and public property, as well as to establish effective
practices to prevent graft and corruption in government.
Ways to Correct Negative Externalities
There are several ways to correct negative externalities. One way is though
the imposition of taxes to discourage the consumption of products which have
adverse effects on the welfare of the consumers. An example of this is the
imposition of excise taxes on cigarettes and alcohol.
Another way is through the issuance of permits. The Land Transportation
Office issues drivers’ licenses. It is also the agency in charge of the
registration of vehicles.
The government can set some standards. The Philippine Standard Quality
and/or Safety Mark and Import Commodity Clearance (ICC) Sticker serve as
the consumers’ guide and assurance that what they purchase meet the
quality standards set by the Philippine National Standards (PNS).
 Some of the Legislations to Correct
Negative Externalities in the Philippines
1. Tobacco Regulation Act of 2003 (Republic Act 9211) which regulates the
packaging, use, distribution and advertisement of tobacco products
and for other purposes.

2. Graphic Health Warning Law (Republic Act 10643) An Act to effectively

instill health consciousness through graphic warnings on tobacco
products.

3. Consumer Act of the Philippines (Republic Act 7394). An act to protect the
consumers, promote their welfare, and establish standards of
conduct for business and industry. It came into effect on July 15, 1992.
 Some of the Legislations to Correct
Negative Externalities in the Philippines
4. Philippine Clean Air Act (Republic Act 8749). A comprehensive air quality
management policy and program which aims to achieve and maintain
health air for all Filipinos.

5. Republic Act 11467 signed into law on January 22, 2020 increasing the
excise tax on alcohol products, electronic cigarettes and heated
tobacco products.
Ways to Promote Positive Externalities
in the Philippines
Education has positive externality and one way to promote education is
to subsidize education. Republic Act 10931 known as the Universal Access
to Quality Tertiary Education Act was signed into law in August 2017 by
President Duterte, providing the underprivileged Filipino students the
opportunity to pursue college degrees through free tuition and
exemption of other fees in State Universities and Colleges (SUCs).

Vaccination has positive externality. It does not only provide protection to

the individuals who got vaccinated, it also prevents the transmission of
the disease. To promote vaccination, the government has to subsidize
or fully assume the cost of the vaccination program. One legislation
pertaining to this is the Republic Act 11525 is called the Covid 19
Vaccination law.
Ways to Promote Positive Externalities in the Philippines

Research has positive externality. One example of legislation promoting

researches in the Philippines is the Republic Act 1606. An Act to promote
scientific, engineering, and technological research, invention and
development.

Patents and Intellectual Property Rights. To encourage innovation, the

government has to legislate laws regarding the protection of intellectual
property rights and patent rights. Some examples include the RA 8293 An
Act prescribing the Intellectual Property Code and establishing the
Intellectual Property Office amended by RA 9150, RA 9502, and RA 10372.
 Ways to Promote Positive Externalities in the Philippines

Another is the RA 165 An Act pertaining to creating a patent office and RA

166 An Act to provide for the registration and protection of trade marks,
trade names, and service marks defining unfair competition and false
marking and providing remedies against the same and for other
purposes.

Presidential Decree No. 49 regarding the protection of intellectual property.

The Philippine Copyright Law is the RA 8293 which is based on the

copyright law of the US. This includes copyright protection for artistic,
literary and derivative works which last during the lifetime of the author
plus 50 years after the author’s death.
 Provision of Public Goods

Public goods are not provided by the private markets because of its nonrival
and non-exclusive characteristics. Goods which are both nonrival and
non-exclusive are called pure public good.

Nonrival characteristic means that the consumption of a good by an

individual is not affected by the consumption of the good by another.

Non-exclusive means that it is costly or impossible for one user to exclude

others from using the good.

The internet, the radio stations, tv stations, clean air and national defense
are also non-rival goods and non-exclusive goods.
 References
1. ASEAN (2021). Consumer Act of the Philippines 1992. in Consumer Protection in ASEAN.
Available at https://aseanconsumer.org/selectcountry=Philippines

2. Business World (2021, June 18). Philippine slumps to lowest competitiveness ranking in 5
years. Available at
https://www.bworldonline.com/philippines-slumps-to-lowest-competitiveness-ranking-in-5-
years/

3. Department of Environment and Natural Resources (2003, August). Primer on Clean Air Act,
Diliman: DENR Public Affairs Office.

4. DOH (2020, January 23). DOH celebrates higher sin taxes , stricter regulations of harmful
products. Available at
https://doh.gov.ph/doh-press-release/doh-celebrates-higher-sin-tax-stricter-regulation-of-
harmful-products

5. DOH. Graphic Health Warnings in the Philippines. Department of Health, Philippines.

Available at https://doh.gov.ph/Graphic-Health-Warnings-in-the-Philippines
 References
6. DOH (2021, March 21). DOH Circulating Covid19 Vaccination Law IRR Not Final. Available at
https://doh.gov.ph/doh-press-release/DOH-CIRCULATING-COVID-19-VACCINATION-LAW-
IRR-NOT-FINAL

7. Intellectual Property Office of the Philippines. Available at

https://www.ipophil.gov.ph/intellectual-property-code-implementing-rules-and-regulations
/

8. OECD/ADB (2020). “Regulatory Impact Assessment in the Philippines.” OECD, Paris.

Available at
https://www.oecd.org/gov/regulatory-policy/regulatory-impact-assessment-philippines-20
20.pdf

9. Official Gazette. Republic Act 9211.Available at

https://mirror.officialgazette.gov.ph/2003/06/23/republic-act-no-9211/
 References
10. Official Gazette (2021, November 28). DTI Standards and Conformance Portal. Bureau of
Philippine Standards. Available at
http://www.bps.dti.gov.ph/index.php/product-certification/ps-and-icc-marks

11. Prodigalidad, Patricia Ann T. and Christopher Louie D. Ocampo. (2021, March24). The
Private Competition Enforcement Review. Available at
https://thelawreviews.co.uk/title/the-private-competition-enforcement-review/philippines

12. Rocamora, Joyce Ann L. (2021, May 18). 1.6 M Pinoy students benefit from free higher
education program. Philippine News Agency. Available at
https://www.pna.gov.ph/articles/1140715

13. Republic Act 1606. An Act to promote scientific, engineering and technological research,
invention and development. Available at
https://www.chanrobles.com/republicacts/republicactno1606.html#:~:text=REPUBLIC%20
ACT%20NO.,TECHNOLOGICAL%20RESEARCH%2C%20INVENTION%20AND%20DEVELO
PMENT
Congratulations for completing the
lectures in Managerial Economics