As I prepare for the class that I'm teaching in the Fall, I came across a term that has always irked me. It's only semantics perhaps, but here goes. As the book defines it:
Market failure- occurs when markets, operating on their own, do not lead to a socially optimal allocation of resources.
When you hear that there is a "market failure" it seems to imply that markets are the wrong way to organize production of the good in question. In reality, a market failure is simply that the market is producing too much or too little of the good.
It doesn't follow from the fact that markets produce to much or too little that alternative means of production will be better. For instance, without regulation there is pollution (one kind of market failure). Our alternative is regulation to correct for the market failure. However, the regulation could be bad in a number of ways: causes output to fall too much, causes prices to rise too much, limits competition, has other unintended and undesirable outcomes.
If we're going to have a term for when markets are not maximizing social well-being, why don't we also get a term for when government does not maximize social well-being. I suggest this:
Government failure- occurs when the costs of gathering information, regulating behavior and monitoring for infractions of the law outweighs the potential benefits of a particular public policy; in other words, when the cure is worse than the disease.
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Great thoughts Bryan, but wouldn't "market failure" be an example of government failure. Polution, for example, is an example of bad property rights (as determined by the government).
ReplyDeleteHa ha. I suppose you could go back and blame market failures the government again. But then I'd have to admit that governments are necessary for markets to function. And we all know that I'm not the kind of guy to do that.
ReplyDeleteThe property rights on air usage are probably an example of property rights that were prohibitively expensive to create. Maybe these days the cost of creating that system has fallen (or the benefits risen).
There may be inefficiency (Harburger triangle) to eliminate, but the fixed costs of eliminating the inefficiency could overwhelm the benefit. Putting us in another non-optimal and potentially worse depending on the incentives of government agents.
But in the end, it probably does all come back to bad government.