Market Failure in Bangladesh

Prepared for:

Sheikh Morshed JahanCourse Instructor: Bangladesh Studies

BBA Program

Prepared by:

Mayesha MehnazRoll: 57, Section: A (19th)

BBA Program

Institute of Business Administration

University of Dhaka

March 31, 2013

Market failure is a concept within economic theory describing when the allocation of goods and services by a free market is not efficient. Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient – that can be improved upon from the societal point-of-view. There are five basic reasons for markets to fail:

Externalities Public good Non-competitive market Information asymmetry Principle-agent Problems

The case discussed below is an example of market failure resulting from negative externality. Negative externality is when a third pays the cost, without gaining any direct advantage or deriving any private benefit from the product.

The Bahaddarhat flyover in Chittagong is a BDT 1.06 billion project, mainly undertaken for easing traffic congestion at the city's entrance from the southeast region. The work had started in December 2010. Two contracting firms, Parisha Enterprise and Meer Aktar Enterprise were initially engaged in the construction of the flyover. (The Financial Express, 2012).

On June 29, 2012 a concrete girder collapsed off the under-construction flyover, injuring a rickshaw puller and suspending traffic movement. Chief engineer of the Chittagong Development Authority (CDA), the implementing agency of the flyover, and other senior officials visited the spot. They instructed workers to urgently remove wreckage and make the Chittagong - Cox's Bazar Highway operational again, instead of conducting any investigation on what lead to the collapse (TazaKhobor, 2012).

Tragedy struck again on November 24, 2012. This time twelve people were killed and 50 injured after three girders fell on a makeshift kitchen market at the construction site of the flyover (bangladeshcorruption.wordpress, 2012). Although a lot of the victims remain unidentified, some among them were pedestrians, rickshaw pullers etc. These people paid with their lives for something they had no direct interest in. Hence these people were merely a third party who paid pays the cost without using the product, resulting in a negative externality.

The contracting firms, in this case Parisha Enterprise and Meer Aktar, had failed to take account of the social costs and risk of the flyover project. As a result they were able to offer a tender price which only reflected the private cost of the firms and which was lower than the socially optimum price. Although this won them the contract initially, it resulted in huge losses for the firms in the long run. Hence, this is a classic incident of market failure, where free market forces were unable to make efficient use of resources. To avoid future incidents as such, the government could implement strict legislation and force to control unwanted corruption and negligence.

Bibliographybangladeshcorruption.wordpress. (2012, 11 29). Retrieved 03 30, 2013, from wordpress:

http://bangladeshcorruption.wordpress.com/tag/bahaddarhat-flyover-project/

TazaKhobor. (2012, 11 25). Retrieved 03 30, 2013, from tazakhobor.com: http://tazakhobor.com/national/1801-bahaddarhat-flyover-girders-collapse-killed-at-least-6-in-chittagong

The Financial Express. (2012, 06 29). Retrieved 03 30, 2013, from the financialexpress-bd: http://www.thefinancialexpress-bd.com/more.php?date=2012-06-30&news_id=134949