Market Failure or Success

Market Failure or Success

The New Debate

Edited by Tyler Cowen and Eric Crampton

Recent years have seen the development of new theories of market failure based on asymmetric information and network effects. According to the new paradigm, we can expect substantial failure in the markets for labor, credit, insurance, software, new technologies and even used cars, to give but a few examples. This volume brings together the key papers on the subject, including classic papers by Joseph Stiglitz, George Akerlof and Paul David. The book provides powerful theoretical and empirical rebuttals challenging the assumptions of these new models and questioning the usual policy conclusions. It goes on to demonstrate how an examination of real markets and careful experimental studies are unable to verify the new theories. New frontiers for research are also suggested.

Chapter 6: Information and efficiency: another viewpoint

Harold Demsetz

Subjects: economics and finance, industrial economics


1 Harold Demsetz The importance of bringing economic analysis to bear on the problems of efficient economic organization hardly requires comment, but there is a need to review the manner in which the notion of efficiency is used in these problems. The concept of efficiency has been abused frequently because of the particular approach used by many analysts. My aim is to examine the mistakes and the vagueness associated with this approach. I shall focus attention on the problem of efficiently allocating resources to the production of information because in this case the issues stand out clearly. Since Kenneth J. ArrowÕs paper ÔEconomic Welfare and the Allocation of Resources for InterventionÕ2 has been most influential in establishing the dominant viewpoint about this subject, my commentary necessarily is a critique of ArrowÕs analysis. The view that now pervades much public policy economics implicitly presents the relevant choice as between an ideal norm and an existing ÔimperfectÕ institutional arrangement. This nirvana approach differs considerably from the comparative institution approach in which the relevant choice is between alternative real institutional arrangements. In practice, those who adopt the nirvana viewpoint seek to discover discrepancies between the ideal and the real and if discrepancies are found, they deduce that the real is inefficient. Users of the comparative institution approach attempt to assess which alternative real institutional arrangement seems best able to cope with the economic problem; practitioners of this approach may use an ideal norm to provide standards from which divergences are...

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