[This is part of the series: The Complete Guide To Economics 101.]
Market Failure is when a market economy does not allocate resources in an efficient way.
The typical – textbook – example of market failure is supposedly pollution.
Say the optimal output for a factory is 100 units.
But the factory pollutes the air as a byproduct of production.
If the factory were liable to pay the full cost of their pollution, optimal production may drop to 90 units.
Therefore, the market has failed to allocate resources efficiently.
This all strikes me as juvenile reasoning, exactly as I noted on externalities.
Isn’t this just a problem of property rights?
Only public property seems to have this issue.
And, again, how do you calculate any of this?
- I produce X.
- “Market failure” says I should have produced Y.
- I pollute a river by Z.
- Nobody owns the river in the public domain.
- Therefore, I own what to whom?
Is it even possible to make an interpersonal comparison of utility?