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What should we do when markets fail?
 

We talk a lot about the "miracle" of markets at Econlib, yet every economics course serves a heaping helping of warnings about market failures.How do these failures happen, and what are we to do about them? 

These questions are our focus in this month's Quick Picks. Perhaps some circumstances that are dubbed market failures really are not. And in other cases, state intervention may well be warranted. But there's also a lot of area of exploration in between. So join us as we dig in!

Speaking of exploring, we hope you've had a chance to explore our related online spaces, such as Econlib's YouTube channel. Look for more coming from our AdamSmithWorks channel (where you can find Bryan Caplan taking a stab at the Smith Questionnaire) and a future home for video from the OLL

Is there something else you'd like to see- either in QuickPicks or online more generally? Let us know at econlib@libertyfund.org or on social media. We're listening.

Is Market Failure a Sufficient Condition for Government Intervention?
“Externality problems are market ‘failures’ only in comparison to the perfectly competitive model’s equilibrium. In other words, the ‘failure’ here is not that markets ‘do not work’ in practice, but that they fail to live up to a blackboard ideal.”
How We Failed Our Economics Students
"It should be no wonder the average U.S. college-educated citizen feels this way. Examining our principles of economics textbooks, one finds the following type of logic: Markets have systematic failures such as externalities, monopolies, business cycles, and public goods, and there is a benevolent omniscient government that can and will come in, properly identify, and correct these things by imposing the ideal solution to the problem. What a disservice we as economists have done to our students! For those readers who have had this type of education in your principles of economics curriculum, I apologize. We, as a profession, have misled you. And for any economics instructors reading, let me tell you how you can do a better job for your students."
Monopoly
No real economy meets the exact conditions of the theorem, and all real economies will fall short of the ideal economy—a difference called “market failure.” In my view, however, the degree of “market failure” for the American economy is much smaller than the “political failure” arising from the imperfections of economic policies found in real political systems. 
Guide: Market Failures
Part of our High School Economics Topics, this guide includes audio, video, and text resources to help you and your students explore.
Letting a Thousand Flowers Bloom
Listen to this EconTalk podcast with Don Boudreaux on Market Failure, and use these "Extra" questions to start a classroom conversation or an outside assignment.
The Public Goods Dilemma
Whether a good can be ‘made public’ by voluntary contributions depends on how rational calculation and anticipation of the behaviour of others leads to a division within a group between free riders and suckers.
Are Markets Imperfect? Of Course, but That's the Point!
What is implied when we postulate that markets are “imperfect” in comparison to the benchmark of perfect competition is that markets are flawed, non-ideal, or otherwise sub-optimal, and therefore in need of correction through government intervention. Who could dispute the logic of this narrative?
Government Failure and Public Choice 
Just like there are several well-theorized sources and examples of market failure (e.g., externalities and public goods), there are likewise several well-theorized sources and examples of government failure.
Externalities
Externalities are probably the argument for government intervention that economists most respect. Externalities are frequently used to justify the government’s ownership of industries with positive externalities and prohibition of products with negative externalities.
Public Goods
The imperfections of market solutions to public-goods problems must be weighed against the imperfections of government solutions. Governments rely on bureaucracy, respond to poorly informed voters, and have weak incentives to serve consumers. Therefore they produce inefficiently.
Coase: The Unexpected Economist
"Coase’s most famous contribution to economics was his criticism of the idea of market failure caused by pervasive ‘externalities.’ Arthur Pigou (1877-1959), in his The Economics of Welfare, had posited the widespread existence in market economies of indirect effects of economic activity, not reflected in prices... The profession took it as an incontrovertible truth that a market economy would normally ail from the proverbial uncontrolled smoke-stacks and unrewarded research laboratory, calling for correction by taxes and subsidies."
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