in orthodox economics, "market failure" is defined relative to the Walrasian ideal of perfect markets interacting with each other (via prices). If the real world doesn't live up to that ideal (as per usual), there is market failure. Market failures are like real-world snakes in an imaginary free-market Eden. (This is basically in agreement with the Sandwichman.)
>> Consider a pharmaceutical company which develops a drug after the >> expenditure of say $1 billion and is able to produce a daily dose for 50 >> cents. The company considers the volume to be sold and realizes that it >> must get, say, $5.00 per pill to make a profit. The formula for the pill is >> public. Without a patent on the drug it can't sell for $5.00, so it needs >> patent protection to be profitable. >> >> Is the need for patent protection "market failure" or is that something >> else? This is an example of a (beneficial) externality, in which the production of knowledge about what drug to make and how to produce it (via research, testing, etc.) leads to others having knowledge without paying for it. So the original producer cannot capture all of the profits that would result from the production of the knowledge by selling the drug (so that it might not be profitable to produce any of it at all). It might also be thought of as a case of public-goods production, in which the other companies are "free riders" on the research, testing, etc. Seen in a third way, private property rights (in knowledge) are not defined well. Again, all externalities are "market failures" as defined relative to the Walrasian utopia. In this case, some non-market or non-competitive solution is needed (such as patent monopolies, but that's not the only alternative, as Sean points out). By the way, because "market failures" are ubiquitous, there's no reason to assume that a correction for one "failure" will actually move the world toward the unknown ideal of Pareto poop. (This is the "Theory of the Second Best.") So-called welfare economics seems to be able to talk about only one or two "imperfections" at a time. Nonetheless, neoliberal powers such as the IMF assume that any move toward market perfection implies an improvement is welfare. -- Jim Devine / It's time to Occupy the New Year! _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
