I would like to focus on the way behavioral economics effects a Essay

I would like to focus on the way behavioral economics effects a failing market - Essay Example The extent to which different markets are free, as well as the rules defining private property, is a matter of politics and policy (Concised Encycliopedia of Economics, Free Markets). This economic system where government allows a free hand to all the firms and entreprenuers is on the basis of some 'behavioural assumptions'. The two basic assumptions; that all the producers and consumers are rational in their behaviour and that they have complete information, has gone wrong and been violated numerous times! So, one has to be very clear about the reality that when the assumptions or the structure of a building is weak then how can it hold the burden and functioning of the entire economy. Here comes the need for Government Intervention and the system of 'laisaz-faire' is taken over by a 'mixed economy'! Economic role of the Government has four main components: 1. what is to be produced? 2. how is it to be produced? 3. for whom to be produced? 4. how are these decisions made? (Joseph St igletz, 2000). Now, lets see how an incentive structure can influence different markets. Institutional structure shapes the economic framework of a country. They build the basic structure of an economy which influences the level, pattern, and sustainability of growth. As an evidence, same macroeconomic models when applied to different countries produce different outcomes altogether! Institutions are a set of formal rules and informal norms that together with enforcement mechanism structure human interaction. They are to contain both incentives and disincentives which constraint human behaviour. The fundamental determinant of types of organizations emerging in a country is the institutions in place. Organizations are the players of the game and institutional framework are the rules of the game (Douglass. C. North, 1999). Organizations therefore try to play the game within the rules provided by the institutions. Institutions provide incentives for the organizations by reducing uncerta inty and risk .institution help in minimizing the transaction cost and the transformation cost. Countries all over the world are experiencing patterns of growth because of their institutional framework. Inefficient institutions provide high transaction cost and as a result the country struggle to grow. Incentives such as working hard are missing in inefficient institutions. Efficient institutions create an institutional matrix which strives for growth by reducing transaction cost and changing informal constraints through perceptions. Therefore once a country is stuck on a certain path of growth due to its institutions then it is difficult to revert back. The institutions drive organizations into a particular direction depending upon the incentive structure present. Through these incentives and disincentives embodied in rules they induce: efficiency, merit based solutions, hard work, competition and innovation. Hence, productivity increases and so does economic growth. In such an ins titutional framework organizations like 'Microsoft' emerge. Emergence of Microsoft was not a fluke; it was a direct result of institutions shaping the kind of organization. It has the highest sales in the entire World Industry of software. The reason is extensive research and development. It knows that if it's not at the cutting edge then it is going to get driven out of the market and go bankrupt. This will have backward and