Market Failure Introduction
The idealized competitive model … will, through the “invisible hand”, distribute goods in such a way that no one could be better-off without making someone worse-off. Economic reality, however, rarely corresponds perfectly to the assumptions of the idealized competitive model.
David L Weimer and Aidan R Vining, Policy Analysis: Concepts and Practice (3rd Edition)
Let me explain what this series is, by first explaining what it is not. I’m not going to be covering what most people think of as the fundamentals of economics (but are rather less central to economics than most people suppose): stuff like unemployment, GDP or inflation. Instead, I’m going to be talking about some of the core economic concepts I think everyone should know so as to better participate in civil society. These concepts collectively go by the name Market Failures, and they outline the ways some markets fail to work properly, and what can be done about it. What does it mean to say a market is working or not? And why should we be letting economists decide that? That’s going to be the first topic.
I hope this series will be of value to people of all political persuasions. While it will address the debate as to whether the government should or shouldn’t intervene in a range of policy issues, but more importantly I intend to focus on the best ways of intervening in a given problem. Too often I see debates around policy issues that collapse into the standard partisan dichotomy – where the debate simply becomes “government good, markets bad” versus “markets good, government bad” with little attempt to figure out where specifically the market and/or government might be going wrong, or what either is doing right. Indeed policy arguments often have no sense of what it means for the market or government to go wrong or right, which is guaranteed to produce horrible confusion.
The perspective I want to convey in this series is one where markets are a tool that performs a particular job, and most of the time when the tool stops working properly the best course of action is to work out why the tool isn’t working and fix it, rather than stubbornly insisting the tool is perfect, or declaring the tool is worthless and should be replaced with one of one’s own devising. Conversely there are situations in which people try to use markets for things that markets are not able to do, and the best course of action is to work around markets to achieve your goals, while leaving them to do what they do well. What I hope to teach you in this series is:
- How to identify when a market has failed.
- A guide as to what the failure(s) are likely to be.
- The best solutions to each type of market failure, based on the work of economists who have studied these failures.
Each class of market failure will be getting a post of its own so we can go into each one in depth, and I’ll be running a weekly schedule. I already have the posts written, so I should actually be able to maintain that schedule.
Here’s an outline of the content of future posts, I’ll add links to this post as each one is released:
- Ideal Markets
- Imperfect Competition
- Collective Action Problems
- Imperfect Information and Risk
- Behavioural Economics
- Government Failure
- Policy Goals other than Allocative Efficiency
Tune in tomorrow for the first post on what a perfect market would look like, and why you should care.