Thanks Sean. Thanks Sandwichman Thanks Jim After I read Sean's reply I realized I wanted the orthodox definition. And I had previously thought of market failure as cost shifting success. My question was caused by reading this passage from Nobelist Michael Spence's article in Foreign Affairs. (Source: Foreign Affairs. 90.4 (July-August 2011): p28.) in Foreign Affairs, Spence, after describing how jobs have moved abroad, says:
Highly educated U.S. workers are already gravitating toward the high-value-added parts of the U.S. economy, particularly in the tradable sector. As labor economists have noted, the return on education is rising. The highly educated, and only them, are enjoying more job opportunities and higher incomes. Competition for highly educated workers in the tradable sector spills over to the nontradable sector, raising incomes in the high-value-added part of that sector as well. But with fewer jobs in the lower-value-added part of the tradable sector, competition for similar jobs in the nontradable sector is increasing. This, in turn, further depresses income growth in the lower-value-added part of the nontradable sector. Thus, the evolving structure of the global economy has diverse effects on different groups of people in the United States. Opportunities are expanding for the highly educated throughout the economy: they are expanding in the tradable sector because the global economy is growing and in the nontradable sector because that job market must remain competitive with the tradable sector. But opportunities are shrinking for the less well educated. Faced with an undesirable economic outcome, economists tend to assume that its cause is a market failure. Market failures come in many forms, from inefficiencies caused by information gaps to the unpriced impacts of externalities such as the environment. But the effects on the U.S. economy of the global economy's structural evolution is not a market failure: it is not an economically inefficient outcome. (If anything, the global economy is generally becoming more efficient.) But it is nonetheless a cause for concern in that it is creating a distributional problem in the advanced economies. Not everyone is gaining in those countries, and some may be losing. So there Spence is saying the income loss for some ... "in the lower-value-added part of the nontradable sector" is NOT market failure. The global economy is becoming more efficient, he says. But nonetheless it is a cause for concern, he says. It is a distributional problem, not market failure, he says. So that is what prompted my question and I now have answers. Thanks. Gene On Jan 27, 2012, at 2:36 PM, Jim Devine wrote: > 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
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