David R. Henderson  

Carden and Horwitz on Market Failure

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Externalities, public goods, asymmetric information, and market power provide necessary--but insufficient--conditions for intervention to be justified. They certainly are not talismans that provide interventionists with carte blanche to tinker with the members of a society as if they were pieces on a chessboard. Too often, critics of markets think that merely invoking these terms destroys the case for free markets. Unfortunately, non-economists often do not understand these terms. Indeed, understanding these terms clearly is only a first step toward a clear understanding of social phenomena. Let's consider each of these concepts in turn.
This is from Art Carden and Steven Horwitz, "Is Market Failure a Sufficient Condition for Government Intervention?" It's one of the two Econlib Featured Articles for April. The whole thing is worth reading. Indeed, I recommend it for many college economic syllabi if you're looking for a self-contained article that deals with the problems with how market failures are usually presented in textbooks.

One of my favorite paragraphs:

Therefore, those who use "negative externalities" as a justification for government action must show two things: first, that the supposed market failure cannot be corrected either through entrepreneurship or by changes in the rules of the game (e.g., more clearly defining property rights to solve the negative externalities associated with a commons6); and second, that the government-imposed solution is both consistent with political incentives and superior to the imperfect market outcome. Unfortunately, people who argue for government intervention to correct externalities rarely carry out this second step. Even more unfortunately, economists rarely carry out this second step.

Also, the authors lead with one of my favorite quotes from one of my favorite movies.

I just noted, by the way, that this is 1500th blog post since joining EconLog. That's a milestone of sorts.

And while we're on the issue of joining EconLog, I'll have an exciting announcement later today.


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COMMENTS (5 to date)
ThomasH writes:

"Externalities, public goods, asymmetric information, and market power provide necessary--but insufficient--conditions for intervention to be justified. They certainly are not talismans that provide interventionists with carte blanche to tinker with the members of a society as if they were pieces on a chessboard."

But they are "tailsmans" to reject a priori any state intervention in the economy whatever. They suggest that possible interventions be considered on the basis of facts insofar as we can know them about the consequenses of the intervention.

Paula writes:

Love the second point - think this ties into the book by Mark Pennington, "Robust Political Economy" which I'm reading. I heard him talk at Cato, where he describes how those who tout market failure do not hold government to the same standard; they ignore government failures. He talks about how gov't failures are usually far worse as they affect more people and are much harder to end (think Post Office, Freddie Fannie, Farm Subsidies. There's no end to bad gov't programs that are impossible to end despite the harm they do, is there?).

I also think the 2nd point is quite understandable when you consider that liberals believe gov't is more noble than the private sector and that somehow greed and evil intent is only found in the free market; the public sector gets a pass.

E. Barandiaran writes:

David,

It's neither sufficient nor necessary. Anyway, since market failure is the foundation for this wp circulated today, you may want to read it

http://www.nber.org/papers/w18921

Yes, it's not different from this other one

http://lsolum.typepad.com/legaltheory/2013/04/sunstein-on-intellectual-progress-and-institutional-design.html

Daniel Kuehn writes:

Is your "exciting announcement for later today" by chance already in the upper right of the EconLib homepage :-D

MikeP writes:

I'll have an exciting announcement later today.

...and you'll have an "April Fool's!" retraction later tonight.

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