8/07/2019

Market Failure Theory as Reproach to Government Practice

"The theory of market failure is a reproach to the free-market economy. Unless you have perfect competition, perfect information, perfect rationality, and no externalities, you can’t show that individual self-interest leads to social efficiency.* And this anti-market interpretation is largely apt. You can’t legitimately infer that markets are socially optimal merely because every market exchange is voluntary.

Contrary to popular belief, however, market failure theory is also a reproach to every existing government. How so? Because market failure theory recommends specific government policies – and actually-existing governments rarely adopt anything like them.

*Contrary to poorly proof-read textbooks, markets can yield social efficiency even if these assumptions are violated. A polluting monopoly is the classic example, but there are endless others. Standard assumptions are a sufficient, not necessary, condition for social efficiency."