The failure of market failure

Abstract

The concept of market failure was originally presented by economists as a normative explanation of why the need for government expenditures might arise. Gradually, the concept has taken on the form of a full‐scale diagnostic tool frequently employed by policy analysts to determine the exact scope and nature of government intervention. For some time, economists have known that the market failure idea is conceptually flawed. The authors of this article demonstrate why this is so, employing concepts drawn from the perspective of transaction costs. In a review of empirical studies, they further show how the market failure diagnostic leads analysts to make generalizations that are not supported by facts. Transaction cost analysis helps to explain the underlying processes involved. © 1999 by the Association for Public Policy Analysis and Management.

Diálogos bilaterales entre investigadores de la Glasgow Caledonian University (Reino Unido) y la Universidad de Alicante (España). Estudios interdisciplinares

“…However, some argue that "the market has no choice but to fail" (Zerbe and McCurdy, 1999: 559) and all markets go through cycles of prosperity, failure and recovery and government intervention will not prevent this. So, in a modern day, liberal capitalist society, like the UK, minimal government intervention is favoured and it is advocated that the market itself is the best regulator (Hood et al, 2001).…”

“…However, this approach arguably promotes a reactive regulatory approach rather than a proactive approach which limits the scope of regulation so, despite fixing one incident, it does not prevent future failures. This leads to the argument that the theory is only adequate to determine if intervention is necessary but not if it is sufficient (Nocella et al, 2014;Zerbe & McCurdy, 1999). Moreover, it is argued that no market is perfect and market failure can be found in any market with transaction costs (Randall, 1983;Zerbe andMcCurdy, 1999, Zhang, 2015).…”

“…This leads to the argument that the theory is only adequate to determine if intervention is necessary but not if it is sufficient (Nocella et al, 2014;Zerbe & McCurdy, 1999). Moreover, it is argued that no market is perfect and market failure can be found in any market with transaction costs (Randall, 1983;Zerbe andMcCurdy, 1999, Zhang, 2015). Therefore, market failure theory is too broad and could lead to over-regulation in a market if used to determine the necessity of intervention.…”

“…The complexity of the food supply chain and the technological process involved in food production causes a deficit between the authorities and businesses which contributes to issues with regulating private industries (Hennessy, 1996). Furthermore, the cost to obtain information is expensive for consumers and authorities and often a cost/benefit analysis determines the level of information gathered and disseminated by authorities and this can create further information illiteracy (Ogus, 1992;Zerbe and McCurdy, 1999).…”

The role of implicit contracts: Building public works in the 1840s in Portugal

“…The normative judgement on the role of government to help in establishing beneficial exchanges posed problems to the Portuguese politicians of the 1840s. Transportation facilities were regarded as a diagnostic tool to foster economic growth in a context of social utility (Zerbe & McCurdy, 1999). As the remedy for externalities and market failure in the provision of public goods might be found in the public sector's involvement, the general concept of the plan for the Portuguese roads was to transform Lisbon, the capital of the Portuguese kingdom, into the hub of the whole network.…”