3 ms·

I admit I don't know much about economy, but how do we identify market failures? Do we have better information processing process than the market? This is hones

by gtt 9y ago

I admit I don't know much about economy, but how do we identify market failures? Do we have better information processing process than the market? This is honest question, not trying to nitpick or something.

vkou 9y ago
Markets can only do one thing well - determine the clearing price of a good. That clearing price has absolutely nothing to do with the cost to produce a good - especially if that cost is borne by someone not involved in the transaction. The only people who think otherwise are Marxists - who believe that, on an equal playing field, the cost of a good is solely determined by the costs to produce it.
msla 9y ago
I won't pretend to be a world expert on market failures, but I can take you through how we come to the conclusion pollution is a result of market failure: It all comes down to negative externalities. In general, an externality is something which happens to an unrelated third party due to some activity. An example of a positive externality is if someone waters their grass using a sprinkler, and there's enough excess spray from that sprinkler to keep your flowers sufficiently watered as well. A negative externality is, well, pollution: A truck drives by, belching toxic gasses, and you get to breathe them. The problem with externalities is that they're not priced into the activity, because the cost is not borne by the person doing the thing which causes the externality. The owner of the truck which belched fumes near you isn't going to pay for your next asthma attack. Therefore, there's no incentive to stop doing those externality-causing activities, so they continue to happen. The other half of the market failure at the heart of pollution is game theory, in this case a Prisoners' Dilemma: Say a company wants to stop polluting, but it can't be the only one, because not polluting is more expensive than polluting, so if it's the only one to stop, it gets out-competed. Thus we have the cooperate-defect choice: Cooperation means agreeing to not pollute as much, and then taking the steps to reduce pollution, and defection means agreeing with your fingers crossed, and then not reducing pollution at all. The best strategy for any individual actor in this system is to defect while everyone else cooperates, so you get to be the big economic winner in a cleaner environment because all the other suckers cooperated and reduced their pollution. So. What's the solution? We need an entity which can make the polluters internalize the costs of pollution, so they're more likely to want to stop polluting for real, and can punish defectors who say they want to stop polluting and then don't. That entity, something which can levy and enforce punishments to pursue a policy, is a government, no matter what else it's called, and it can do those things because it's not bound to the same incentive structures which caused the market failure.

by gtt 9y ago

vkou 9y ago

Markets can only do one thing well - determine the clearing price of a good. That clearing price has absolutely nothing to do with the cost to produce a good - especially if that cost is borne by someone not involved in the transaction. The only people who think otherwise are Marxists - who believe that, on an equal playing field, the cost of a good is solely determined by the costs to produce it.

msla 9y ago

I won't pretend to be a world expert on market failures, but I can take you through how we come to the conclusion pollution is a result of market failure: It all comes down to negative externalities. In general, an externality is something which happens to an unrelated third party due to some activity. An example of a positive externality is if someone waters their grass using a sprinkler, and there's enough excess spray from that sprinkler to keep your flowers sufficiently watered as well. A negative externality is, well, pollution: A truck drives by, belching toxic gasses, and you get to breathe them. The problem with externalities is that they're not priced into the activity, because the cost is not borne by the person doing the thing which causes the externality. The owner of the truck which belched fumes near you isn't going to pay for your next asthma attack. Therefore, there's no incentive to stop doing those externality-causing activities, so they continue to happen. The other half of the market failure at the heart of pollution is game theory, in this case a Prisoners' Dilemma: Say a company wants to stop polluting, but it can't be the only one, because not polluting is more expensive than polluting, so if it's the only one to stop, it gets out-competed. Thus we have the cooperate-defect choice: Cooperation means agreeing to not pollute as much, and then taking the steps to reduce pollution, and defection means agreeing with your fingers crossed, and then not reducing pollution at all. The best strategy for any individual actor in this system is to defect while everyone else cooperates, so you get to be the big economic winner in a cleaner environment because all the other suckers cooperated and reduced their pollution. So. What's the solution? We need an entity which can make the polluters internalize the costs of pollution, so they're more likely to want to stop polluting for real, and can punish defectors who say they want to stop polluting and then don't. That entity, something which can levy and enforce punishments to pursue a policy, is a government, no matter what else it's called, and it can do those things because it's not bound to the same incentive structures which caused the market failure.