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The failure of market failure

Author

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  • Richard O. Zerbe

    (University of Washington, Seattle)

  • Howard E. McCurdy

    (American University, Washington DC)

Abstract

The concept of market failure was originally presented by economists as a normative explanation of why the need for government expenditures might arise. Gradually, the concept has taken on the form of a full-scale diagnostic tool frequently employed by policy analysts to determine the exact scope and nature of government intervention. For some time, economists have known that the market failure idea is conceptually flawed. The authors of this article demonstrate why this is so, employing concepts drawn from the perspective of transaction costs. In a review of empirical studies, they further show how the market failure diagnostic leads analysts to make generalizations that are not supported by facts. Transaction cost analysis helps to explain the underlying processes involved. © 1999 by the Association for Public Policy Analysis and Management.

Suggested Citation

  • Richard O. Zerbe & Howard E. McCurdy, 1999. "The failure of market failure," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 18(4), pages 558-578.
  • Handle: RePEc:wly:jpamgt:v:18:y:1999:i:4:p:558-578
    DOI: 10.1002/(SICI)1520-6688(199923)18:4<558::AID-PAM2>3.0.CO;2-U
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    Cited by:

    1. Boudes, Philippe & Darrot, Catherine, 2016. "Biens publics : construction économique et registres sociaux," Revue de la Régulation - Capitalisme, institutions, pouvoirs, Association Recherche et Régulation, vol. 19.
    2. Peter Schmidt, 2015. "Market vs. system failure as a rationale for EU regional policy? A critique from an evolutionary economic perspective," ERSA conference papers ersa15p842, European Regional Science Association.
    3. Anders Gustafsson & Andreas Stephan & Alice Hallman & Nils Karlsson, 2016. "The “sugar rush” from innovation subsidies: a robust political economy perspective," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 43(4), pages 729-756, November.
    4. Richard O. Zerbe, 2013. "Ethical benefit–cost analysis as art and science: ten rules for benefit–cost analysis," Chapters,in: Principles and Standards for Benefit–Cost Analysis, chapter 8, pages 264-293 Edward Elgar Publishing.
    5. Kleiss, Torsten, 2008. "Institutional arrangements for municipal solid waste combustion projects," Schriftenreihe der Professur Betriebswirtschaftslehre im Bauwesen / Series of the Chair Construction Economics, Bauhaus-Universität Weimar, Faculty of Civil Engineering, Chair of Construction Economics, volume 6, number 6, April.
    6. Radu Musetescu, 2013. "State Aid in the European Union in the Context of the Contemporary Economic Crisis," Knowledge Horizons - Economics, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 5(1), pages 30-37, March.
    7. Just Richard E. & Schmitz Andrew & Zerbe Richard O., 2012. "Scitovsky Reversals and Practical Benefit-Cost Analysis," Journal of Benefit-Cost Analysis, De Gruyter, vol. 3(2), pages 1-12, May.
    8. Sharon Alvarez & Jay Barney & Arielle Newman, 2015. "The poverty problem and the industrialization solution," Asia Pacific Journal of Management, Springer, vol. 32(1), pages 23-37, March.
    9. Amir HEFETZ & Mildred E. WARNER, 2010. "Dynamics of service provision: service, market and place characteristics," Departmental Working Papers 2010-33, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    10. Sinclair Davidson & Jason Potts, 2016. "The Social Costs of Innovation Policy," Economic Affairs, Wiley Blackwell, vol. 36(3), pages 282-293, October.
    11. Beare, Stephen & Newby, Jonathan C., 2005. "Incomplete Markets, Excluded Goods and Natural Resource Management," 2005 Conference (49th), February 9-11, 2005, Coff's Harbour, Australia 137785, Australian Agricultural and Resource Economics Society.
    12. Finbarr Livesey, 2012. "Rationales for Industrial Policy Based on Industry Maturity," Journal of Industry, Competition and Trade, Springer, vol. 12(3), pages 349-363, September.
    13. Raul V. Fabella & Vigile Marie Fabella, 2015. "Re-Thinking Market Failure in the Light of the Imperfect State," UP School of Economics Discussion Papers 201506, University of the Philippines School of Economics.
    14. Oates, Wallace E. & Portney, Paul R., 2003. "The political economy of environmental policy," Handbook of Environmental Economics,in: K. G. Mäler & J. R. Vincent (ed.), Handbook of Environmental Economics, edition 1, volume 1, chapter 8, pages 325-354 Elsevier.
    15. Steele, Scott R., 2009. "Expanding the solution set: Organizational economics and agri-environmental policy," Ecological Economics, Elsevier, vol. 69(2), pages 398-405, December.
    16. Udechukwu Ojiako & Tinashe Manungo & Max Chipulu & Johnnie Johnson, 2013. "The Impact of Regulation on Risk Perception: Evidence from the Zimbabwean Banking Industry," African Development Review, African Development Bank, vol. 25(3), pages 276-288, September.
    17. J.A. den Hertog, 2010. "Review of economic theories of regulation," Working Papers 10-18, Utrecht School of Economics.
    18. Mark D. White, 2007. "A Kantian Critique of Antitrust: on Morality and Microsoft," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 22(Spring 20), pages 161-190.
    19. Peter Schmidt, 2015. "Market failure vs. system failure as a rationale for economic policy? A critique from an evolutionary perspective," Papers on Economics and Evolution 2015-04, Philipps University Marburg, Department of Geography.
    20. Schade, Jutta & Wallström, Peter & Olofsson, Thomas & Lagerqvist, Ove, 2013. "A comparative study of the design and construction process of energy efficient buildings in Germany and Sweden," Energy Policy, Elsevier, vol. 58(C), pages 28-37.
    21. Xun Wu & M. Ramesh, 2014. "Market imperfections, government imperfections, and policy mixes: policy innovations in Singapore," Policy Sciences, Springer;Society of Policy Sciences, vol. 47(3), pages 305-320, September.

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