What are some situations in which a free market fails?

There are many different type of market failure, so there are also many different situational causes. For example:

1. Price-inelastic demand eventually leads to efficiency failures — which is why many goods subject to long-term price-inelastic demand end up being heavily regulated and/or socialized.

2. Rampant speculation has led to market failures through cycles of overvaluation, undiversified concentrations of capital, over-extended leveraging, and subsequent collapse…and to overly abstracted and complex instruments that “game the system” (the post-financialized system, that is) and perpetuate this cycle. This leads to greater debt burdens, bailouts, knee jerk regulations, and tanking of economic activity (constriction of credit and capital flows, etc.).

3. Negative externalities create market failures with the costs catch up with production and are finally accounted for — often because the externalities end up being situationally imposed, widespread and inescapable across entire markets (regardless of regulatory reactions, legal actions, product boycotts, etc., which also interrupt market allocations).

4. Resource depletion is a pretty common contributor to market failure.

5. Runaway rent-seeking also consistently leads to market failures because the market was excluded from the get-go.

6. Monopolies (whether naturally occurring or as a consequence of crony capitalism) are probably the single greatest contributors to longer-term market failure.

7. Unattended markets (i.e. unregulated markets) nearly always fail — there are only a handful of exceptions to this in recorded history.

There are more situations, but those are some of the ones worth researching carefully to understand why markets to fail in various ways. Pareto efficiency is a useful standard to evaluate failure, but there are many other metrics that help us evaluate when a market isn’t working as intended.

My 2 cents.


Trackback specific URI for this entry

This link is not meant to be clicked. It contains the trackback URI for this entry. You can use this URI to send ping- & trackbacks from your own blog to this entry. To copy the link, right click and select "Copy Shortcut" in Internet Explorer or "Copy Link Location" in Mozilla.

No Trackbacks


Display comments as Linear | Threaded

No comments

The author does not allow comments to this entry