Market failure
Market failure is a concept in economics for situations in which coordination does not lead through the market to an optimal allocation of resources in terms of welfare economics. That system, based on neoclassical foundations concept was elaborated in 1958 by Francis Bator explicitly calling.
The central causes of market failure are information asymmetries (example: adverse selection in the market for used cars), externalities ( effects of production and consumption decisions that do not reflect the market directly, for example: environmental damage ), natural monopolies and public goods.
Market failure is considered as a necessary but not sufficient condition to draw intervention of the state to improve the allocation of resources into consideration. To be justified from a regulatory standpoint, would have government intervention in individual cases actually lead to an allocation improvement.
- 2.2.1 resolution mechanisms
- 2.3.1 State intervention as a solution mechanisms
- 2.3.2 market reactions to external effects
- 2.4.1 State intervention as a solution mechanisms
- 3.1 line of argument
- 3.2 Criticism
Term
In the neoclassical theory of economics, it comes through the price mechanism in a model assumed perfect market to a market equilibrium that induces an efficient allocation of resources. A situation is then called efficient if it is Pareto- optimal, ie, no other distribution of goods is possible, through the at least one player would be better off without a worse position at the same time to another. The Neoclassical theory defines a specific market situation constitute a market failure if the allocation by deviations from perfect market model is not Pareto- optimal. Thus, market failure is associated with the waste or the lie fallow socially scarce resources. In extreme cases it can cause the collapse of the market.
If there were, the First Fundamental Theorem of Welfare Economics accordingly, for all scarce resources perfectly competitive markets, it would not be possible in equilibrium market failure. But in reality, the functioning of the price mechanism is always a cost, would - in terms of this unrealistic standard - always a relative market failures exist ( Nirvana accusation ). According to Kenneth Arrow market failure is therefore only given if the " transaction costs are so high that no longer worth the existence of the market". Arrow also speaks of the "failure of markets to exist". Therefore, the term "market failure" for John Berger 's "misleading". It is not as if " that existing markets are not functioning properly and in this sense, ' fail, but that it is not possible from various, mostly technical reasons, reasons to establish markets for certain tasks. "
The neoclassical theory sharply divided between allocation and distribution, which defines market failure as a purely allocative defect, not as an evaluation of the distribution of wealth and income. In addition to the allocative market failure market failure is spoken with reference to Richard Musgrave (1959 ) and distributive ( and also from the economy ). Distributive market failure exists, therefore, if the result of the market process does not agree with the ideas about what is fair and right in a normative sense. Another criticism of this conceptual extension that the market will not be reasonably taken for a fair distribution of income in claim and therefore can not fail in this regard.
Applications of the neoclassical model
Asymmetric information
Asymmetric information exists when the potential contractors have in a market does not have the same information about the quality of goods or services provided to or in respect of a risk to be insured. The best-known example of a resulting suboptimal resource allocation is the A. Akerlof pointed out by George Lemons problem on the used car market. The concern of the poor informed market participants to be disadvantaged, resulting in a market price that only the worst vendors sell to their cars. There is no full market clearing, but to a negative selection or, in extreme cases, to a complete collapse of the market. Also asymmetric information on financial markets are cited as a reason for market failure, as most bank creditors are not in a position to assess the quality of bank management.
State intervention as a solution mechanisms
The prevention of disinformation other market participants but also serve parts of business law ( in Germany, for example, the provisions on Terms in the Civil Code ); at the same time to protect the less well informed statutory warranty rights.
Building brand reputation with lack of information
The information problems can be solved to some extent even without direct government intervention through marks or certificates from a trusted source, which are intended to signal quality.
Public Goods
Markets can fail in terms of Pareto- efficient provision of public goods. Public goods are characterized by ( largely ) non- rivalry in consumption and (usually ) non-excludability from consumption. For example, the country's security is a public good - it is simultaneously consumed by all residents in a country without the benefit of each individual consumption is affected by the consumption of other individuals. At the same time, no single individual can be excluded. In the literature, public goods are partly seen as a case of positive externalities ( to the next section).
The private (that is, on markets or similar based on voluntary ) provision of such goods suffer from free-rider behavior, which is to let the provide good from the other, and then come in the free enjoyment of the goods. Although total may a sufficiently large willingness to pay would be present, but no sale effective market demand would come about due to the non-excludability for this commodity.
Resolution mechanisms
It was the failure of decentralized allocation mechanisms for public goods often the socially organized (typically, so state ) is required deployment. Although the state can ensure by resorting to Taxes and similar charges prescribed the financing of public goods, but remains unresolved the definition of an efficient provisioning amount for the public good. In order to determine this, information about the individual value estimates ( WTP ) are essential. The reliable collection of such information is difficult or impossible (so-called Gibbard - Satterthwaite theorem), but in any case connected with information gathering costs, which hinder or prevent the achievement of an efficient allocation. Incidentally caused any additional consumption of that good marginal cost of zero, an exclusion of additional users is therefore Pareto inefficiency, since reversed due to the nichtrivalisierenden use a higher utility level can be achieved.
Externalities
One reason for market failure can also be external effects. An external effect occurs when a trade between two market participants (negative or positive ) impact on innocent third parties. To damage the exhaust of a truck (negative) not only the sender and receiver of the goods and the beautification of a building can enhance surrounding buildings (positive). According to the neoclassical theory, the interests of third parties in market transactions, ie acting by the parties on the market, not taken into account, so that the allocation of resources considered economically was no longer efficient. Because the effects on third parties would not be included in the price calculation of buyers and sellers, they would have no influence on the price. In economics, a allokatives market failure is therefore assumed for environmental damage.
State intervention as a solution mechanisms
Market failure due to external effects can theoretically be eliminated by internalization, ie the fact that market participants need to include the external costs caused to their cost-effectiveness calculus ( polluter pays principle ). In the Pigouvian tax, the state solves the market failure by taxing the polluter in the amount of external costs. However, the state has to the amount of external costs as accurately as possible know and there may also be no transaction costs. Coase bargaining and the Pigouvian tax are two examples.
Another solution prohibitions are environmentally hazardous forming substances or bids for use dangerous contempt ringer applicable procedures.
Market reactions to external effects
By the Coase theorem can be shown that among the theoretically ideal conditions ( clear allocation of ownership and property rights, full rationality, no transaction costs) comes to negotiations in the market, to internalize ( Mitberücksichtigung ) of the external effects of the market participants lead. Against this background of many environmental economists a - demanded justification of tradable usage rights, so that adverse effects can be internalized, for example by trading pollution permits - sovereign.
Market power ( monopolies and cartels)
According to the theory of natural monopoly, there are certain markets in which a monopolist can establish itself on the market. In such cases, the monopolist will be able to determine market prices. A profit-maximizing monopolist offer its products at prices that are higher than the marginal cost ( Cournot point ) and thus prevent a Pareto- optimal allocation.
For the cartel in which two or more vendors talk from, allowing them to agree on higher prices.
State intervention as a solution mechanisms
Government intervention to prevent monopolies or cartels is mostly carried out by antitrust laws.
Market failure as justification for government intervention
Line of argument
Neoclassical economists usually assume that the state should intervene only when market failures. Extensive repairs would therefore market activity slowing down, as markets in their self-regulatory principles would be disturbed. However, states or governments can arrange the pursuit of political objectives of minimization of Market Inefficiency. While policy interventions affect the market-based self-tuning, but the willingness to suffer by interfering with optimized systems temporarily drawbacks is an important option, which can be explained by game theory and expands the scope of action of players very effective.
The first fundamental theorem of welfare economics formulated sufficient conditions under which the allocation in a competitive economy is Pareto- efficient. If one or more of these conditions is violated, the market allocation is not necessarily more efficient. This results in potentially starting points for government intervention.
However, there is a Pareto- efficient market allocation, it means any deviation thereof ( for example, through government intervention ) that it will then go to at least one individual in the economy worse off than before. This may be desirable, such as when the distribution situation is to be changed by redistribution of Empire after arm. Using the Pareto criterion, which allows only a partial order on the socially attainable states, such measures are then not assessable.
In general, interventions go in a Pareto- efficient market allocation associated with the loss of Pareto efficiency; the only form efficiency innocuous interventions are (practically not feasible ) allocations at the beginning of equipment ( Second Law of welfare economics ). In reality, the conditions of Pareto- efficient allocation, however, are not or only to be found approximately. According to the theory of the second best, it is then possible that the attempt by the production of only some of the conditions leading to a further deterioration of market outcomes. Instead, it may be the best alternative course of action when state intervention through a meaningful " counter-distortion " and the so far realized conditions of Pareto optimality by optimizing conditions of the modified model replaced. For example, it might be useful as a second-best solution to reduce unemployment by not market-based protectionist measures when the flexibility of the labor market - can not prevail politically - as a first-best solution.
Criticism
Supporters of public choice theory emphasize a lack of causal relation between the presence of market failures and state intervention. They justify this with the risk of state failure, ie the costs of government intervention may be greater than what the cost of market failure. Public choice economists attribute this to fundamental problems of democratic systems and the strong influence of lobbyists. Both lead them back to a rent-seeking behavior in both the private sector and in the government bureaucracy. The school of thought suggests colloquially as " market failure" designated cases for this reason rather than the absence of the pure market due to a subversion of the free market by the coercive effect of a policy intervention.
From ordoliberaler perspective argues Manfred E. Streit, the theory of market failure would lead to an economically weak and politically justified economically - questionable preference of state functions. Measured against the ideal of perfect competition would be the market economic reality always in need of correction. In addition, would " referring to the state intervention designed as a well-meaning and all-knowing ," in stark contrast to the political-economic explainable state action.
Market failure and the theory of the firm
Following the theory of the firm, the Coase first formulated in "The Nature of the Firm" (1937 ), Oliver Williamson assumes that hierarchically structured business organizations can cope with forms of market failure. The reasons for the formation of business enterprises, in particular, lack of information and high transaction costs in markets apply. However, hierarchical organizations bring specific disadvantages. The optimal size of firms is determined by the balance between market failure and the failure of hierarchical organizations. Following Coase and Williamson call representatives of the new institutional economics to overcome the dichotomy of market and government failure and to establish a general theory of organizational failure. The goal is the capability of different social institutions would be like, among others also NGOs and families to evaluate comparatively.