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Modes of Market Failure

Summary:
At lunch last week Richard Thaler was skeptical that I had managed to identify ten different modes of market failure. I admit that this list has a little too much of the Borges-List Nature, but I do think it holds up. What do you think?: The Market Economy: Modes of Failure: Markets can go wrong—badly wrong. They can: not fail, but be failed by governments, that do not properly structure and support them—or that break them via quotas, price floors/ceilings, etc.... be out-of-equilibrium... possess actors have market power... be afflicted—if that is the word—by non-rivalry (increasing returns to scale; natural monopolies)... suffer externalities (in production and in consumption, positive and negative; closely related to non-excludibility)... suffer from information lack or

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At lunch last week Richard Thaler was skeptical that I had managed to identify ten different modes of market failure. I admit that this list has a little too much of the Borges-List Nature, but I do think it holds up. What do you think?: The Market Economy: Modes of Failure: Markets can go wrong—badly wrong. They can:

  1. not fail, but be failed by governments, that do not properly structure and support them—or that break them via quotas, price floors/ceilings, etc....

  2. be out-of-equilibrium...

  3. possess actors have market power...

  4. be afflicted—if that is the word—by non-rivalry (increasing returns to scale; natural monopolies)...

  5. suffer externalities (in production and in consumption, positive and negative; closely related to non-excludibility)...

  6. suffer from information lack or asymmetry...

  7. suffer from maldistributions—for the market will only see you if you have a willingness to pay, which is predicated on an ability to pay…

  8. suffer from non-excludability (public goods, etc.)...

  9. suffer from miscalculations and behavioral biases...

  10. suffer from failures of aggregate demand...


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Bradford DeLong
J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.

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