Last updated on May 24, 2015
In economics, a market failure is something that prevents a free market from attaining Pareto efficiency. A Pareto-efficient allocation is an allocation wherein it is not possible to make some people better off by redistributing resources without making at least someone worse off. Specific types of market failures are negative externalities (e.g., pollution, overfishing), public goods (e.g., education and vaccines), information asymmetries (e.g., adverse selection and moral hazard), fragmented or missing markets (e.g., the market for credit in developing countries), and so on.
What market failures are not is Stuff White People Dislike (SWPD). If you are not familiar with the satirical Stuff White People Like blog, it is well worth paying a visit; the site pokes fun at educated, liberal, upper middle-class people — the yuppies of yore, which the site refers to as “white people” for short — and among its many entries, one finds things like TED talks, the World Cup, being offended, graduate school, threatening to move to Canada, hybrid cars, Whole Foods and grocery co-ops, and so on.
Why am I bringing up the obvious fact that the concept of market failure has a strict definition, and that definition is not SWPD? Because all too often, I hear people talk of “market failures” when it is obvious that they are talking about something they dislike.
Given my research interests, I more often than not hear about SWPD-as-market-failure in the context of food and agriculture. Last summer, I was talking to a journalist who told me that the fact that food production in the US had moved away from many small farms to fewer large farms (as a consequence of increasing returns to scale, mind you) was a market failure. Likewise, I’ve heard people refer to the fact that some neighborhoods don’t have any stores selling fresh fruits and vegetables a market failure (when it could well be that stores in those neighborhoods simply don’t sell such things because there is no demand for those goods).
Here are some actual examples of people mistakenly using “market failure,” albeit not in the context of food policy:
- Online privacy is a market failure! Why? Because most people click “Accept” blindly when they are presented with the usual “Terms and Conditions” notice, without reading the fine print, which creates an information asymmetry. Well, no: If someone is too lazy to read the fine print and blindly clicks “Accept,” the failure is with that person, not with the market. A true information asymmetry is where it is impossible to find out what the other party to a transaction knows that you don’t.
- Transportation is a market failure! “‘I walk, cycle and get the tube to get to Westminster. This needs to be looked at from the user’s perspective,’ she said. For some of Creagh’s constituents living on Wakefield’s estate, it’s cheaper for a family to use a taxi together than to pay for the bus. ‘This is market failure,’ she said.” Is it? It’s cheaper for me and my wife have someone come to our house and care for our two dogs for a day than it is for us to board them at doggy day care for an entire day. How is getting something better at a cheaper price a market failure?
I’m all for an improved level of public policy discourse as well as for public policy debates informed by the rational analysis provided by the tools of economics rather than by emotions. But there is always a danger that certain concepts that have a clear definition get misused (or worse, get used disingenuously) by someone trying to score a rhetorical point. Many such concepts have been entirely misappropriated (see here for the misuses of the term “volatility”); let’s make sure this does not happen with market failures.