A Skeptical Look at How Economists and Others Often Use the Term Market Failure
A topic that gets a lot of play in most undergraduate microeconomics courses is the issue of market failure. Unfortunately, while the concept is sound, many people and even many economists err in one of three ways. First, they often attribute problems to market failure that are actually the result of government intervention. Second, economists often fall into the trap of doing “armchair economics” and fail to look at the real world where some of the things they call market failures are often market successes. Third, although non-economists and economists can sometimes point to examples where markets fail to achieve the economist’s ideal and to the fact that no apparent government intervention causes it, they often conclude, without examining how government works, that the government will do better.
This is the opening paragraph of David R. Henderson, “A Skeptical Look at Market Failure,” Defining Ideas, July 14, 2023.
Under the second item, I discuss lighthouses and contracts between bee owners and orchard owners. I also quote one of my favorite lines from Ronald Coase, which, it turns out, was not original with Coase.
Under the third item, I discuss Demsetz’s distinction between the “Nirvana approach” and his preferred “comparative institutions approach.”
Read the whole thing.
The picture above is of Harold Demsetz.