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‘Market failure’ arguments are a poor guide to policy

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  • Ryan Bourne

Abstract

‘Market failure’ is frequently offered as a justification for government intervention in the economy. Proponents of interventions can point to almost limitless examples of markets which do not meet all the criteria for Pareto optimality and argue that government taxation, subsidies or regulation can perfect them, maximising social welfare. But comparing market outcomes with an unattainable and unidentifiable ideal is not useful in a world of imperfect knowledge and government failure. It is better to compare market outcomes against realistic alternatives. Furthermore, even within the market failure paradigm, concepts such as ‘public goods’ and ‘negative externalities’ are routinely misunderstood and inconsistently applied. This leads to predictably poor policy outcomes.

Suggested Citation

  • Ryan Bourne, 2019. "‘Market failure’ arguments are a poor guide to policy," Economic Affairs, Wiley Blackwell, vol. 39(2), pages 170-183, June.
    • Handle: RePEc:bla:ecaffa:v:39:y:2019:i:2:p:170-183
    DOI: 10.1111/ecaf.12346
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    Cited by:

    1. Philip Booth, 2022. "Private regulation versus government regulation: The example of financial markets," Economic Affairs, Wiley Blackwell, vol. 42(1), pages 30-49, February.

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