New Horizons in Law and Economics series
Chapter 7: The Failure of Market Failure
7.1 INTRODUCTION The failure to include transactions costs when considering whether a rule or practice is efﬁcient is one of the most pernicious problems in economics. It has led to endless difﬁculties. This chapter delineates the role of transactions costs in considering efﬁciency. It shows that a proper consideration of transactions costs reveals the market failure approach – and the prescriptions for government intervention based upon it – to be incoherent. Axiom 7(a) states: ‘Transactions costs are to be included in evaluating an economic change or in determining economic efﬁciency.’ This simple axiom has powerful implications for the concept of market failure and the question of the proper role of government in the marketplace. This question is an old and fundamental one. Public ofﬁcials throughout the world grapple with this issue, deciding which public services to provide or how to regulate the activities of individuals and ﬁrms, a task made more urgent by recent efforts to privatize public responsibilities and ‘reinvent’ government. In the search for objective standards by which such decisions can be made, public ofﬁcials increasingly have turned to the concept of market failure. Use of the market failure concept is widespread, both in teaching curricula and in practicing government circles. This chapter demonstrates once again the limitations of the market failure concept. Its shortcomings have been known for some time, but with little consequence, since its use continues to be widespread. In this chapter I summarize the conceptual problems of the market...
You are not authenticated to view the full text of this chapter or article.
Elgaronline requires a subscription or purchase to access the full text of books or journals. Please login through your library system or with your personal username and password on the homepage.
Non-subscribers can freely search the site, view abstracts/ extracts and download selected front matter and introductory chapters for personal use.
Your library may not have purchased all subject areas. If you are authenticated and think you should have access to this title, please contact your librarian.