Market Failures

This starts, hopefully, a series on particular market failures. This post is to serve as an introduction to the market. I will use the word "market" in both broad and narrow terms in the series.

Market failures can occur because they lack safety (which the police and courts are supposed are supposed to remedy by ensuring transactions get completed). Market failures can also occur because of human error and general human behavior.

Classical economic theory (where all people involved in the market are rational and the system creates wealth) has been assaulted before and those critiques, while important, have failed to produce a lasting alternative to capitalism and the free market. Communism has been pronounced dead, although I sense that a form will be reintroduced.

What remains to be seen is if capitalism can be pronounced dead. Capitalism has always been credited with increasing the increasing the “pie” or to most efficiently use resources at its disposal. Communism was always credited with making available resources more equitable. As the divide between the rich and the poor grows, charges of inequity are rising against capitalism. However, even the efficiency claims of the market have been critiqued.

An incredible amount of work has been done in the field of economics in the last fifteen years, primarily concentrating on behavioral economics and environmental economics. Some of the highlights question the rationality of decision making by human beings and the mismeasurement of the costs of production.

Pareto efficiency is the type of efficiency measured by economists in the field of public economics. I will explain this more in a later post. The cost & benefit of government ‘intrusion’ is measured against the market failure to see whether involvement is justified.

Some of the following ideas critique the market's equitable distribution, many others critique its efficiency structure:

Pricing Problems:
People are Rational:
Asymmetric Information:
Endowment Effect:
Halo Effect:
Personal Preferences Effect:
Externalities:
Scarcity:
One Dollar, One Vote:
Menu Prices:
Labor & Capital Movements Unequal:
Time Horizons Unequal:
Different Playing Fields with Globalization (Different Environments: Business):
Cost of Information:
View of Land and Resources as Unlimited:
Public Goods:
Advertising:
Credit and Trust:
Greed:
Monopolies, Oligopolies, and Cartels:
Goods Not Valuable Included in Measurement:
High Transaction Costs:

These do not reflect all market failures, but an introduction into the topic. I hope to add more topics later.