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Market failures

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Thursday, Oct 4, 2007

It’s easy to be lulled into complacency when thinking about the putative wisdom of markets, and I’ve found myself guilty of it lately: listening to a co-worker complain about the death of mom-and-pop type stores in Manhattan, I sat silently thinking that if New Yorkers truly cherished such stores, they wouldn’t be disappearing. Of course the situation is not so clear-cut—big chains make their bucks elsewhere and then contribute to the rent inflation that makes smaller businesses unprofitable. Chains can defray the expenses of flagship outlets in prestigious locations by trimming costs around the margins at workaday branches in humdrum suburban strip malls. But since I’ve inundated myself with econothink, I tend to put the burden of proof on those who want to tamper with the workings of markets, particularly for the provision of nonessential goods. So this Slate column by economist Joel Waldfogel, worked for me as a timely corrective. His main point is that individual taste doesn’t dictate what is available in the marketplace:


Two simple conditions that prevail in many markets mean that individual taste alone doesn’t determine individual satisfaction. These conditions are 1) big setup costs and 2) preferences that differ across groups; when they’re present, an individual’s satisfaction is a function of how many people share his or her tastes. In other words, in these cases, markets share some of the objectionable features of government. They give bigger groups more and better options.



Waldfogel’s point here is that markets stifle diversity, but in a perverse way, this strikes me as an argument in markets’ favor; why should we labor under the tyranny of individuals’ taste, and the waste and inefficiency necessary to cater to each and every person out there? Maybe long-tail marketing and internet distribution can mitigate the collective burden of this somewhat, but still—markets may be useful to the degree that they break people out of selfish expectations and gratifications, teach them that gathering goods is the part of life in which you should conform and accept what’s available, and its the actual conduct of your life that brings to it its individualized color. What’s wrong with markets is not that that can’t gratify individualistic desires, but that they can and that marketers do whatever they can to foster such wishes.


But Waldfogel is right in pointing out that there is nothing particularly “just” about market outcomes, anymore than politically motivated outcomes determined by bureaucrats. The main argument in the market outcome’s favor is the illusion of control it affords the consumer—you seem to have no one to blame but yourself. But in a functioning democracy, a popularly elected government can contribute the same illusion of control, only you spend your vote rather than your dollar to shape your economic outlook. But the case I would want to make is that there is no point in expecting justice of that sort—of the “right” to have one’s peculiar wants serviced—in the marketplace, and that one should be looking for justice, fulfillment, self-expression, and so on elsewhere.


UPDATE: Economist Glen Whitman has a similar take.

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