Edited by David B. Audretsch, Isabel Grilo and A. Roy Thurik
Chapter 2: The Simple Economics of Technology Entrepreneurship: Market Failure Reconsidered
* Philip E. Auerswald Technological progress fuels economic growth. The Administration’s technology initiatives aim to promote the domestic development and diﬀusion of growth- and productivity-enhancing technologies. They seek to correct market failures that would otherwise generate too little investment in R&D. The goal of technology policy is not to substitute the government’s judgment for that of private industry in deciding which potential ‘winners’ to back. Rather the point is to correct [for] market failure. (1994 Economic Report of the President, p. 191)1 Introduction Among policy practitioners, few concepts are used at once as widely, or as imprecisely, as that of ‘market failure’. In contexts ranging from terrorism insurance to technological innovation, both advocates and opponents of government programs point to market failure as the basic test of a government role. The logic is presumably simple: a role for government exists if, but only if, a market failure exists. Policy discussions premised on the market failure test invariably are reduced to debates over the strength of evidence that markets are not competitive – and, therefore, a government role is warranted. A fundamental problem with this approach is that ‘market failure’ as properly deﬁned is neither a necessary nor a suﬃcient condition for government action. The ﬁrst reason is an obvious one: a perfectly competitive market achieves an eﬃcient outcome but not necessarily an equitable one. Consequently, even in the absence of market failure, concerns over equity rather than eﬃciency may suggest an important and legitimate role...
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