My Texts

Social responsibility and market failure

A Position Paper Social Responsibility reters to the loyalty ot the executives ot a company to important social objectives as opposed to shareholders, employers, and owners. A socially responsible company is much more likely to try to keep customer service high and prices lower, even though increasing prices would be in the better interest of the business. It is important for the economy because a socially responsible business positively influences the economy.

Consumers will want to be patrons of socially responsible business, and people will want to work for an ethically sound business. Milton Friedman argued in the article “Social Responsibility of Business is to Increase its Profits,” that executives are employees of the owners, and that is where their direct responsibility lies. l However, today there is much scrutiny given to businesses that aren’t socially responsible. About 10 years ago, only a handful of Fortune 500 companies created a sustainability report, and now a great majority has sustainability reports crafted.

In fact, more than 8,000 businesses around the world have signed the United Nations Global Compact pledging to show good global itizenship in the categories of human rights and labor and environmental standards. 2 I believe that social responsibility is lacking in the United States because of the weakened economic state. When the economy is growing and thriving, consumers are more willing to pay higher prices for goods and services if the added cost is going to socially responsible causes.

Environmental protection and higher employee wages are social objectives that in “good times” can easily be carried out with a slightly higher cost to the consumer. In an economy recession or period of slow economic rowth, consumers are looking for ways to spend less and save more of their money. To keep customers during this time, corporations and businesses must compete and try to keep prices low, taking away any cost effective way to contribute to social responsibility.

Market failure is the inefficiency by the free market to effectively allocate goods and services. In the particular instance of market failure affecting social responsibilities, I believe negative externalities are to blame. For example, the effects of environmental pollution causing the cost of production to be more harmful to ociety than the private cost of the actual production is one large negative externality. The problem of external costs arises in a free market economy because nobody has true legal ownership over air and rivers, and cannot prevent or charge for their use as a dump for waste. In these cases, control must be left to government or local authorities. In the graph below, a simple supply and demand graph shows the lack of incentive for companies to be socially responsible when the private cost of production is much less than the social cost of that product.

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