MGT 330
Siyu Zheng
Janice Goldman
Paper I
The article “Army Overseer Tells of Ouster Over KBR Stir” by James Risen talks about the Army official, Charles M. Smith, who was removed from his job because he refused to pay $1 billion to KBR for their service as a private contractor. KBR is a company that provides food, housing and other basic service to American troops. Mr. Smith refused to compensate KBR because he found this charge is questionable, and some of money was not used for Iraq operation.
From the movie Iraq for Sale, we know that in recent years government’s general practice is to contract with private companies, and ask them provide food and service to troops. There are over a hundred thousand private contractors working in Iraq. Government pays a huge number of money to those private companies like KBR instead of spending that money directly on troops. In Iraq, when American soldiers eat bad food and drink unclear water, they have no choice. To make the case even worse, KBS had also warned “if it was not paid, it would reduce payments to subcontractors, which in turn would cut back on service” (Army, 6/17/2008). KBS tries to use their power to threaten government and get huge financial benefits.
This is a case of market failure, and having a monopoly is where the market fails. In this article, KBR is the only company that provides food and service to American troops. A monopoly can “restrict its production or sales in an arbitrary way. To maximize profit, a producer in this position would easily be tempted to make artificial shortage of things which buyers want and sell them at inflated price” (Goldsmith, Ch2, P. 30). KBS receives a high-profit contract, but did not spend money on troops. Since KBR don’t have any competitors, even when they do not provide quality food and service, they still get the contract. If they didn’t get the payment, they will stop all service and food to army, which is a consequence that government cannot afford to take.
This is also an example of government failure. One reason of the result of a government failure is that the government is corrupt. “Ever since KBR emerged as the dominant contractor in Iraq, critics have questioned whether the company has benefited from its political connections to Bush administration” (Army, 6/17/2008). KBR has not been responsible to American taxpayers multiple times, and, according to auditors, KBR has a huge amount of money in cost that was not credible. Under these circumstances, Bush administration still gave contracts to KBR. Easily, people would be skeptical about the relationship between Bush administration and KBR Corporation. Another reason of government failure is government lack of regulation. When market failure appears, government needs to strengthen regulation; government should enhance policy to limit and control the behavior of KBR. Also government should punish KBR to have non-credible cost until they provide adequate information to justify their expenses.
The second article “(No) Drill, Baby, Drill” by Thomas Friedman explains how Costa Rica insists on both economic growth and environmental protection. Until now, Costa Rica still preserves an amazing biodiversity. In most countries, “ministers of environment are marginalized,” and any people think ministers of environment cannot create economic value. However, in Costa Rica, government puts a single minister to be in charge of both environment and energy so the environment department and energy department can support each other and help each other when it comes to policy making on environmental protection. It’s a good way to protect the environment and to maintain the growth of economy at the same time.
As Arthur Goldsmith describes externality in his book, “for many transactions, the cost or benefit spills over onto third parties who are not directly involved in the transaction. Alfred Marshall in 1890 began to call these spillovers ‘externalities’” (Goldsmith, Ch. 2, p. 28).
