Editing Market failure (section)

{{Short description|When markets do not produce goods or services as efficiently as possible}}
[[File:Godorf Cologne Rhineland-Refinery-Cooling-Towers-during-demolition-02.jpg|thumb|right|200px|While factories and refineries provide jobs and wages, they are also an example of a market failure, as they impose [[negative externalities]] on the surrounding region via their [[air pollution|airborne pollutants]].]]

In [[neoclassical economics]], '''market failure''' is a situation in which the allocation of [[goods and services]] by a [[free market]] is not [[Pareto efficient]], often leading to a net loss of [[economic value]].<ref>{{Cite web|last=NSW Government|date=2017|title=A guide to categorising market failures for government policy development and evaluation|url=https://media.opengov.nsw.gov.au/pairtree_root/41/eb/7e/1a/65/1b/4e/a2/b8/d8/68/9a/1d/8d/75/1a/obj/PUB17_509_Market__failure_guide.pdf|website=New South Wales Department of Industry}}</ref><ref>John O. Ledyard (2008). Market Failure, ''The New Palgrave Dictionary of Economics''</ref><ref name="krugman">[[Paul Krugman]] and [[Robin Wells Krugman|Robin Wells]] (2006). ''Economics'', New York, Worth Publishers.</ref> The first known use of the term by economists was in 1958,<ref name="Bator">[[Francis M. Bator]] (1958). "The Anatomy of Market Failure," ''Quarterly Journal of Economics'', 72(3) pp. [http://instruct1.cit.cornell.edu/Courses/econ335/out/bator_qje.pdf 351–379] (press '''+''').
</ref> but the concept has been traced back to the Victorian writers [[John Stuart Mill]] and [[Henry Sidgwick]].<ref>[[JS Mill]], ''Principles of Political Economy]]'' (1848) Book V, chapter IX, on exceptions to laissez faire</ref><ref name="Medema">Steven G. Medema
(2007). "The Hesitant Hand: Mill, Sidgwick, and the Evolution of the Theory of Market Failure," ''History of Political Economy'', 39(3), [http://hope.dukejournals.org/cgi/pdf_extract/39/3/331 pp. 331]–358. 2004 [http://www.utilitarian.net/sidgwick/about/2004070102.pdf Online Working Paper.] {{Webarchive|url=https://web.archive.org/web/20070927021943/http://www.utilitarian.net/sidgwick/about/2004070102.pdf |date=2007-09-27 }}</ref>
Market failures are often associated with [[public goods]],<ref>[[Joseph E. Stiglitz]] (1989). "Markets, Market Failures, and Development," ''American Economic Review'', 79(2), pp. [https://www.jstor.org/stable/1827756 197–203.]</ref> [[time-inconsistent preferences]],<ref>•Ignacio Palacios-Huerta (2003) "Time-inconsistent preferences in Adam Smith and David Hume," ''[[History of Political Economy]]'', 35(2), pp. 241–268 [http://www.palacios-huerta.com/docs/hopefinal.pdf]</ref> [[Information asymmetry|information asymmetries]],<ref>• Charles Wilson (2008). "adverse selection," ''The New Palgrave Dictionary of Economics'' 2nd Edition. [http://www.dictionaryofeconomics.com/article?id=pde2008_A000040&edition=&field=keyword&q=asymmetric%20information&topicid=&result_number=7 Abstract.]<br />&nbsp;&nbsp; • [[Joseph E. Stiglitz]] (1998). "The Private Uses of Public Interests: Incentives and Institutions," ''Journal of Economic Perspectives'', 12(2), pp. [https://www.aeaweb.org/articles?id=10.1257/jep.12.2.3 3–22.]</ref> [[Market structure|failures of competition]], [[principal–agent problem]]s, [[externalities]],<ref name= "Laffont">[[Jean-Jacques Laffont|J.J. Laffont]] (2008). "externalities," ''[[The New Palgrave Dictionary of Economics]]'', 2nd Ed. [http://www.dictionaryofeconomics.com/article?id=pde2008_E000200&q=externality&topicid=&result_number=9 Abstract.]</ref> [[unequal bargaining power]],<ref>[[Adam Smith]], ''The Wealth of Nations]]'' (1776) Book I, chapter 8. [[Thomas Piketty]], ''[[Capital in the Twenty-First Century]]'' (2011) ch 9, ‘insofar as employers have more bargaining power than workers and the conditions of “pure and perfect” competition that one finds in the simplest economic models fail to be satisfied…’. Discussed in E McGaughey, ‘Behavioural Economics and Labour Law’ (2014) [https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2460685 LSE Law, Society and Economy Working Papers 20/2014], 12-14 in A Ludlow and A Blackham, New Frontiers in Empirical Labour Law Research (2015) ch 6</ref> behavioral irrationality (in [[behavioral economics]]),<ref>e.g. D Kahneman, ''[[Thinking, Fast and Slow]]'' (2011)</ref> and macro-economic failures (such as unemployment and inflation).<ref>J Stiglitz and J Rosengard, ''The Economics of the Public Sector'' (2015) ch 4</ref>

The neoclassical school attributes market failures to the interference of [[self-regulatory organization]]s, governments or supra-national institutions in a particular [[Market (economics)|market]], although this view is criticized by heterodox economists.<ref>[[Kenneth J. Arrow]] (1969). "The Organization of Economic Activity: Issues Pertinent to the Choice of Market versus Non-market Allocations," in ''Analysis and Evaluation of Public Expenditures: The PPP System'', Washington, D.C., Joint Economic Committee of Congress. PDF reprint as pp. [http://www.econ.ucsb.edu/~tedb/Courses/UCSBpf/readings/ArrowNonMktActivity1969.pdf 1–16] (press '''+''').</ref><ref name="rees">{{cite book |last=Gravelle |first=Hugh |author2=Ray Rees |title=Microeconomics |publisher=Prentice Hall, Financial Times |year=2004 |location=Essex, England |pages=314–346}}</ref> Economists, especially [[microeconomics|microeconomists]], are often concerned with the causes of market failure and possible means of correction.<ref name="mankiw">{{cite book |last=Mankiw |first=Gregory |author2=Ronald Kneebone |author3=Kenneth McKenzie |author4=Nicholas Row  |title=Principles of Microeconomics: Second Canadian Edition |publisher=Thomson-Nelson |year=2002 |location=United States |pages=157–158 }}</ref> Such analysis plays an important role in many types of [[Public policy (law)|public policy]] decisions and studies.

However, government policy interventions, such as [[tax]]es, [[Subsidy|subsidies]], [[Incomes policy|wage]] and [[price controls]], and [[regulation]]s, may also lead to an inefficient allocation of resources, sometimes called [[government failure]].<ref name="weimervining">{{cite book |last=Weimer |first=David |author2=Aidan R. Vining |title=Policy Analysis: Concepts and Practice |url=https://archive.org/details/policyanalysisco0000weim_u3o9 |url-access=registration |publisher=Prentice Hall |year=2004 |isbn=9780131830011}}</ref> Most mainstream economists believe that there are circumstances (like [[building code]]s, [[fire safety]] regulations or [[endangered species]] laws) in which it is possible for government or other organizations to improve the inefficient market outcome. Several [[heterodox economics|heterodox]] schools of thought disagree with this as a matter of ideology.<ref name="n. gregory mankiw">{{cite book |last=Mankiw |first=N. Gregory |author-link=N. Gregory Mankiw |title=Brief Principles of Macroeconomics |publisher=South-Western Cengage Learning |year=2009 |pages=10–12}}</ref><ref>{{cite web | url=https://blogs.law.ox.ac.uk/housing-after-grenfell/blog/2020/01/reflecting-systemic-failures-illustrated-fire-safety-crisis | title=Reflecting on the systemic failures illustrated by the fire-safety crisis in blocks of flats &#124; Oxford Law Blogs | date=15 January 2020 }}</ref> An ''ecological'' market failure exists when human activity in a market economy is exhausting critical [[non-renewable resource]]s, disrupting fragile ecosystems, or [[Pollution|overloading]] biospheric waste absorption capacities. In none of these cases does the criterion of Pareto efficiency obtain.<ref name=hd03 />