Market failure

While factories and refineries provide jobs and wages, they are also an example of a market failure, as they impose negative externalities on the surrounding region via their airborne pollutants.

In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value.[1][2][3] The first known use of the term by economists was in 1958,[4] but the concept has been traced back to the Victorian philosopher Henry Sidgwick.[5] Market failures are often associated with public goods,[6] time-inconsistent preferences,[7] information asymmetries,[8] non-competitive markets, principal–agent problems, or externalities.[9]

The existence of a market failure is often the reason that self-regulatory organizations, governments or supra-national institutions intervene in a particular market.[10][11] Economists, especially microeconomists, are often concerned with the causes of market failure and possible means of correction.[12] Such analysis plays an important role in many types of public policy decisions and studies.

However, government policy interventions, such as taxes, subsidies, wage and price controls, and regulations, may also lead to an inefficient allocation of resources, sometimes called government failure.[13] Most mainstream economists believe that there are circumstances (like building codes, fire safety regulations or endangered species laws) in which it is possible for government or other organizations to improve the inefficient market outcome. Several heterodox schools of thought disagree with this as a matter of ideology.[14][15] An ecological market failure exists when human activity in a market economy is exhausting critical non-renewable resources, disrupting fragile ecosystems, or overloading biospheric waste absorption capacities. In none of these cases does the criterion of Pareto efficiency obtain.[16]

  1. ^ NSW Government (2017). "A guide to categorising market failures for government policy development and evaluation" (PDF). New South Wales Department of Industry.
  2. ^ John O. Ledyard (2008). Market Failure, The New Palgrave Dictionary of Economics
  3. ^ Paul Krugman and Robin Wells (2006). Economics, New York, Worth Publishers.
  4. ^ Francis M. Bator (1958). "The Anatomy of Market Failure," Quarterly Journal of Economics, 72(3) pp. 351–379 (press +).
  5. ^ Steven G. Medema (2007). "The Hesitant Hand: Mill, Sidgwick, and the Evolution of the Theory of Market Failure," History of Political Economy, 39(3), p p. 331–358. 2004 Online Working Paper. Archived 2007-09-27 at the Wayback Machine
  6. ^ Joseph E. Stiglitz (1989). "Markets, Market Failures, and Development," American Economic Review, 79(2), pp. 197–203.
  7. ^ •Ignacio Palacios-Huerta (2003) "Time-inconsistent preferences in Adam Smith and David Hume," History of Political Economy, 35(2), pp. 241–268 [1]
  8. ^ • Charles Wilson (2008). "adverse selection," The New Palgrave Dictionary of Economics 2nd Edition. Abstract.
       • Joseph E. Stiglitz (1998). "The Private Uses of Public Interests: Incentives and Institutions," Journal of Economic Perspectives, 12(2), pp. 3–22.
  9. ^ J.J. Laffont (2008). "externalities," The New Palgrave Dictionary of Economics, 2nd Ed. Abstract.
  10. ^ Kenneth J. Arrow (1969). "The Organization of Economic Activity: Issues Pertinent to the Choice of Market versus Non-market Allocations," in Analysis and Evaluation of Public Expenditures: The PPP System, Washington, D.C., Joint Economic Committee of Congress. PDF reprint as pp. 1–16 (press +).
  11. ^ Gravelle, Hugh; Ray Rees (2004). Microeconomics. Essex, England: Prentice Hall, Financial Times. pp. 314–346.
  12. ^ Mankiw, Gregory; Ronald Kneebone; Kenneth McKenzie; Nicholas Row (2002). Principles of Microeconomics: Second Canadian Edition. United States: Thomson-Nelson. pp. 157–158.
  13. ^ Weimer, David; Aidan R. Vining (2004). Policy Analysis: Concepts and Practice. Prentice Hall. ISBN 9780131830011.
  14. ^ Mankiw, N. Gregory (2009). Brief Principles of Macroeconomics. South-Western Cengage Learning. pp. 10–12.
  15. ^ "Reflecting on the systemic failures illustrated by the fire-safety crisis in blocks of flats | Oxford Law Blogs". 15 January 2020.
  16. ^ Cite error: The named reference hd03 was invoked but never defined (see the help page).