Tag: Market Failures

Self-Dealing Elites

one important factor is the capture of the American political system by powerful insiders — big businesses, elite professionals, wealthy homeowners — that use it to entrench their own economic power.

Charles Nast - Boss Tweed

Our predicament of slow growth and sky-high inequality has many causes, but one important factor is the capture of the American political system by powerful insiders — big businesses, elite professionals, wealthy homeowners — that use it to entrench their own economic power. In so doing, they protect themselves from competition, fatten their bank accounts with diverted wealth and slow the creative destruction that drives economic growth.

Four key policy areas shed light on the growth of this political-economic swamp — financial regulation, intellectual property, occupational licensing and zoning.

NYTimes  11/26/17.

Who Says Bureaucracy Doesn’t Add Value?

It’s a favorite trope of conservatives and libertarians to claim that government regulation only reduces productivity and increases cost of goods and services.  From the

Auto Car Crash 1960s

manufacturing firm’s point of view, this is true.

However, we live in a

republic of people, not firms, and that one-

sided point of view leaves out the other side of market failure situations, such as consumer safety.

The cost of dangerous automobiles and highways still existed back in the days before airbags and seatbelts, only the cost did not appear on the publicly held companies financial ledgers. Rather, those very real costs were transferred to the consumers, who died at a rate more than 8 times as high as before the imposition of “bureaucratic” safety standards.

Regulations did not make the cost of cars go up, rather they merely made the true costs of safe cars transparent.

Highway Deaths Rates 1946-2016 - NYT - 2017-11-09.jpeg

Source: NYTimes 11/7/17.

Economic Externalities

Economic externalities explain how society works when the market fails.

Externalities, quoting Wikipedia, are:

In economics, an externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit.[1] Economists often urge governments to adopt policies that “internalize” an externality, so that costs and benefits will affect mainly parties who choose to incur them.[2]

For example, manufacturing activities that cause air pollution impose health and clean-up costs on the whole society, whereas the neighbors of an individual who chooses to fire-proof his home may benefit from a reduced risk of a fire spreading to their own houses. If external costs exist, such as pollution, the producer may choose to produce more of the product than would be produced if the producer were required to pay all associated environmental costs. Because responsibility or consequence for self-directed action lies partly outside the self, an element of externalization is involved. If there are external benefits, such as in public safety, less of the good may be produced than would be the case if the producer were to receive payment for the external benefits to others. For the purpose of these statements, overall cost and benefit to society is defined as the sum of the imputed monetary value of benefits and costs to all parties involved.  Thus, unregulated markets in goods or services with significant externalities generate prices that do not reflect the full social cost or benefit of their transactions; such markets are therefore inefficient.

Externalities are pricing mechanism (market) failures. When the market fails, another entity must step in to correct the pricing distortions.  Typically, this other entity is government.