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Why markets do not fail. Buchanan on voluntary cooperation and externalities


  • Alain Marciano


During the 1950s and 1960s, many economists were convinced that externalities were a cause of “market failures” -- because individuals are not capable of internalizing the costs their actions impose to others -- and therefore that the intervention of the state was necessary to allow an efficient allocation of resources. The paper presents the analyses of an economist, James Buchanan, who systematically tried to show that externalities should not be viewed as a problem for market efficiency. The central argument Buchanan used to defend markets was the human propensity to internalise the external effects of their actions and to pay for the goods they consume. We describe the intellectual trajectory he followed from the early 1950s -- when he started to work on “spillover“ -- to the mid- 1960s to complete a consistent explanation of the efficiency of market mechanisms and private arrangements in presence of externalities. By adopting an historical perspective, we are able to show the remarkable consistency of Buchanan's claims about externalities, even though he developed them in a period when the views of economists on the question were changing dramatically.

Suggested Citation

  • Alain Marciano, 2010. "Why markets do not fail. Buchanan on voluntary cooperation and externalities," Center for the History of Political Economy Working Paper Series 2010-05, Center for the History of Political Economy.
  • Handle: RePEc:hec:heccee:2010-5

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    References listed on IDEAS

    1. Robert J. Barro, 2013. "Inflation and Economic Growth," Annals of Economics and Finance, Society for AEF, vol. 14(1), pages 121-144, May.
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    Cited by:

    1. Alain Marciano, 2012. "A review of John Meadowcroft, James M. Buchanan, Major Conservative and Libertarian Thinkers, volume 17, Continuum, New-York, London, 2011," The Review of Austrian Economics, Springer;Society for the Development of Austrian Economics, vol. 25(3), pages 279-281, September.
    2. Marciano, Alain, 2011. "Buchanan on externalities: An exercise in applied subjectivism," Journal of Economic Behavior & Organization, Elsevier, vol. 80(2), pages 280-289.

    More about this item


    Buchanan; externalities; social cost; market efficiency; spontaneous order;

    JEL classification:

    • B2 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925
    • B3 - Schools of Economic Thought and Methodology - - History of Economic Thought: Individuals
    • H0 - Public Economics - - General
    • H1 - Public Economics - - Structure and Scope of Government
    • H4 - Public Economics - - Publicly Provided Goods


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