Disadvantages Of Institutions

What are institutions? Institutions are a set of rules which are followed by people to ease exchange between human on all levels. They are constraints devised by humans to shape human interactions. They are not to be confused together with organizations as institutions are merely rules, they do not consist of any political, economic or social bodies. There are two types of institutions, formal institutions and informal institutions. The former consists of rules which are devised by us humans, while the latter consists of social conventions and norms. Institutions mainly affect the economy on two departments, the cost of exchange and cost of production. The transactions and transformation costs together with technology employed determines

Especially in countries that begin with extreme inequalities, these attributes hold true. This is due to the powerful and wealthy altering government policies and institutions to ensure they have larger political power, creating laws and policies that are advantageous for themselves rather than the general public. The abuse of government policies concerning access to public land, natural resources, establishment and use of financial institution, and property rights in technological information causes the elite to keep their place on top in the expense of the disadvantaged people. This denies lots of economic opportunities to the less advantaged and causes inefficiency in the economy, as the economic potential of these people are not fully realised due to the biased institutions. Not only that, competition is also reduced due to the elites having so much wealth and power, the smaller firms will be weeded out by the larger firms and monopolies or oligopolies will form, this will cause barriers of entries and increase in prices of products. Financial and government institutions are very important to sustained economic growth, as it can be seen from the above passages, if abused; these institutions can cause large inefficiencies in the market and economy. However, if these institutions are done correctly and power and wealth can

The role institutions play in the economy, regarding the cost of exchange and production has a great link with the market and the economy. Then again, with that being said, it is really hard or close to impossible to measure the actual influence of institutions accurately as it is difficult to find out exactly how an institution affect each and every individual, and in turn affect the economy. Empirical data on how the institutions affect the economy is hard to figure out and calculate, there are many theoretical analysis on the effects of institutions but without the backing of empirical data, I’m afraid the real impact and importance institutions have on sustained economic growth will not be