Tuesday, August 3, 2010

What is Market Failure?

For anyone that has read a high school or college level economics textbook, 'market failure' is one of those bold, defined study words. You know, in economic theory "wherein the allocation of goods and services by a free market is not efficient." Well, I don't think that simple definition does the job. It brings about a loaded word at the end of the statement: efficient. What is efficiency? Is something efficient to me, also (and always) efficient to you? I don't think so. The word "efficient," when speaking about whether something is optimal, must be subjective to individual values. Murray Rothbard dives into this subject a bit more in his work, "America's Great Depression." If the Serbians (speaking on the mass genocide in South Eastern Europe) wish to eradicate the Muslims in their country, then wiping out every Muslim is efficient. However, this is not true for the Muslims, for they do not wish to be wiped out. So we're brought to the conclusion that efficiency is determined by the wants of one individual (individuals can hold similar wants). Therefore, it's hard to determine what the free market has actually failed to do unless we recognize the wants of each individual.

In the definition of Market Failure, we're left to assume that the free market fails to allocate goods and services to the collective efficiently - producing a net loss. If we assume that some sort of forceful hand is necessary to correct this imperfection in the market, then we must also assume humans are prone to creating error, and error must be corrected by this same forceful hand. This topic will definitely be a post for later.

Photo thanks to this site.


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