A little linguistic note on market failure

It is entirely true that markets, markets alone and all the time markets, do not solve every problem that either we or society are prey to. The trick is to work out when they are so they can be left alone and when they are not so that some other mechanism needs to be used.

Which brings us to the phrase “market failure”. For example, the Stern Review calls climate change the world’s biggest market failure ever. This is then taken to mean that as markets have failed in this instance then we must, clearly and obviously, move to non-market methods of solving the problem.

This is not actually what “market failure” means. We can take it, if we wish, to mean that this particular construction of markets has failed, so far, to deal with this problem. But a much better translation into colloquial is that “market failure” means “we have failed to have a market in this” rather than “markets have failed with this”.

With this clarification it then becomes obvious what we should be doing - having a market in this. Which is why the Stern Review does go on to insist that the solution to the market failure of climate change is to create a market via a carbon tax. Or, if we prefer, to shoehorn the issue into our currently extant markets.

Given that this is the solution insisted upon it must therefore be true that the meaning of market failure is as we describe. The failure is not of markets, but the failure to have the relevant market.

This also applies more generally. The provision of public goods can be seen as a market failure - given that the logical definition of public goods is something that markets don’t deal well with the provision of this seems reasonable. Often enough, although not always, the answer is the creation of a market though patents, copyrights and trademarks.

So too with externalities. These are things that are external to market processes. Between sometimes and often the solution is to make them into internalities so that markets do deal with them.

We’re entirely willing to agree that markets don’t solve every problem. But we will insist that market failure does, often enough, mean a failure to have a market rather than that markets have failed.