Modes of Market Failure
Fairly Recently: Must- and Should-Reads, and Writings... (February 18, 2019)

The Market: As an Institution, Its Pros, and Its Cons

Berkeley png The Market as an Institution: “The Market” as an Institution:

  • We start from what look like to us deep truths of human psychology

    • People are acquisitive
    • People engage in reciprocity—i.e., want to enter into reciprocal gift-exchange relationships
      • In which they are neither cheaters nor saps
      • With those they trust…
  • We devised property as a way of constructing expectations of trust…

  • We devised money as a substitute for trust…

  • And so, on the back of these human propensities for acquisition and for trusted gift-exchange, we have constructed a largely-peaceful global 7.4B-strong highly-productive societal division of labor:

    • Built on assigning things to owners—who thus have both the responsibility for stewardship and the incentive to be good stewards…
    • And on very large-scale webs of win-win exchange…
    • Mediated and regulated by market prices...
  • This is a very valuable and important societal institution…

    • Economics is the study of how it—what we usually call “the market”—works…
    • In analyzing the market as an institution, we need to cover:
      • The success of the market
      • The failures of the market
        • Plus there is the peculiar domain of “macroeconomics”
      • The political-economic-sociological-historical context of the market
      • The impact of a market economy on the other institutions and practices of society


Three Aspects of Market Success: The market failure-free competitive market in equilibrium, from the perspective of a utilitarian seeking to achieve the greatest-good-of-the-greatest-number, accomplishes the following goals. It:

  1. produces at a scale that exhausts all possible win-win exchanges—and is “efficient” in that sense.

  2. allocates the roles of producers and sellers to those who can make and sell them in a way least costly to society’s overall resources—to those with the lowest opportunity cost.

  3. rations the commodities produced to those with the greatest willingness-to-pay—to those who, by the money standard, "need" (or rather want) them "the most" (by being willing to give up the most in terms of other societally-valued things in order to use or possess them).


Ten Modes of Market Failure: Markets can go wrong—badly wrong. They can:

  1. not fail, but be failed by governments, that do not properly structure and support them—or that break them via quotas, price floors/ceilings, etc.

  2. be out-of-equilibrium

  3. possess actors have market power

  4. be afflicted—if that is the word—by non-rivalry (increasing returns to scale; natural monopolies)

  5. suffer externalities (in production and in consumption, positive and negative; closely related to non-excludibility)

  6. suffer from information lack or asymmetry

  7. suffer from maldistributions—for the market will only see you if you have a willingness to pay, which is predicated on an ability to pay…

  8. suffer from non-excludability (public goods, etc.)

  9. suffer from miscalculations and behavioral biases

  10. suffer from failures of aggregate demand...

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