From my Cincinnati peeps….. Has anyone thought of something similar here: Cincinnati suing banks over empty eyesores
Read the story carefully. Lots of financial institutions want it both ways. They essentially want to foreclose on you, but don’t want to file the paperwork to actually make the transaction and then incur the liabilities of actual ownership. Can’t have your cake and eat it as well. I bet we could come up with a list of properties comparable to what is being litigated over in Cincinnati in half a heartbeat. The legal netherworld lots of institutions are operating in when it comes to foreclosure is about as close to market failure as we come. Where’s Coase when you need him?
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This approach provides a way to see the problems government has in allocating resources even remotely well: It’s not just that government gets it wrong at various points but that political processes do not have the same error detection and correction abilities that markets have. Political actors are far less likely to know when they’ve erred and to have the right incentives to correct things. Government is not only less able to get it right; it’s also less able to know when it’s got it wrong.
A whole new light is now shed on the idea of “market failure.” In this more Austrian view, markets frequently “fail” by not allocating resources optimally at a given time. But calling this a “failure” ignores the Austrian point that what markets are particularly good at is telling us that resources are not optimally allocated and providing the knowledge and incentives necessary to correct the errors. From the Austrian perspective, “failure” should refer not to suboptimal allocation at a given time, but rather the inability to detect and correct error. If we understand that the crucial question is how well alternative processes do those things, we realize that supposed market “failures” are better seen as opportunities for market successes.
“Market failure” occurs quite often in the free market because costless, infinite, perfect information does not exist. As such, there will always be times when resources are not allocated as efficiently as possible. What statists fail to realize is that the same holds true for state-governed markets. Switching from a demand to a command economy doesn’t magically cause costless, infinite, perfect information to appear. Rather, what happens is that those in charge of a command economy take on the pretense of knowledge.
Another flaw in analyzing “market failure” is analysis makes use of static models even though the market is a dynamic entity. This usually leads to calls for intervention at the slightest sign of trouble, even though the market has repeatedly proven to be self-correcting. A simple glance at any growth chart, whether of nations or businesses, or any other market entity, will show that growth is not perfectly linear. Sometimes, say, a business will experience market growth; other time it will experience losses. Some strategies will work spectacularly; others will flop like a dead fish. Trying to pronounce judgment on a given system in response to just one small sliver of data is foolish, to say the least.
A better method of analysis is to compare a system’s historic performance in relations to its purpose/ability. No one claims that the free market serves as a system of social justice, nor does anyone claim that it operates smoothly and flawlessly. Really, the only claim that anyone can make is that the free market is the most efficient of allocating scarce resources to those who desire them the most. Historically, the free market has done a very good job of accomplishing this goal, particularly in comparison to the alternatives. America’s market slowdown in recent years is due to the government’s attempt at imposing a soft statism over the economy.
Does the free market fail occasionally? Most certainly. But is that failure permanent or uncorrectable? Most certainly not. More importantly, the free market, even with all it imperfections, is still the best method of allocating scarce resources.
In his book, ‘The Upside of Irrationality’, Dan Ariely claims to have identified a market failure in the online introductions market. He refers to a survey indicating that people participating in that market spent on average 5.2 hours per week searching profiles and 6.7 hours per week emailing potential partners for a payoff of 1.8 hours actually meeting them.
‘Talk about market failures. A ratio of 6:1 speaks for itself. Imagine driving six hours in order to spend one hour at the beach with a friend (or even worse, with someone you don’t know and are not sure you will like)’.
When I read that my first thought was that it would not be particularly uncommon in Australia for young people to drive three hours to spend an hour with a friend and then drive for another three hours back to where they came from.
I think the term market failure is thrown around too loosely. The situation described clearly involves high transactions costs, but that doesn’t mean the market has failed. The existence of high transactions costs in a market should not be viewed as a symptom of market failure unless we can point to some reason why the market cannot function efficiently.
In this instance the market seems to be working well because evidence relating to the existence of high transactions costs has induced some enterprising people to consider what innovations might be introduced to reduce those transactions costs. The fact that the innovators were a university professor and his associates suggests to me that university staff may be becoming more entrepreneurial.
I think Dan Ariely has done a good job of demonstrating the potential for behavioural economics to help entrepreneurs to design innovations that may reduce transactions costs. He considers survey and experimental evidence which suggests that the high transactions costs associated with online introductions stem from the attempt to reduce humans to a set of searchable attributes. The problem is that the searchable attributes convey little information about what it might be like to spend some time with particular individuals.
Ariely and his associates developed a virtual online dating site that enabled participants to engage anonymously in instant message conversation about various images e.g. movie clips and abstract art. They found that participants were about twice as likely to be interested in a real date after meeting in person following the virtual date than following a conventional online introduction. It seems that when we experience something with another person we gain much more information about compatibility than when we just look at searchable attributes. He has discussed his research here.
It is too soon to know whether Dan Ariely and his associates have prompted a market innovation that will help large numbers of people to live happier lives. However, I think Ariely has demonstrated that behavioural economics may be able to help markets work better. As he points out, there is potential for firms to do a better job of satisfying consumer demand by conveying to consumers what it might actually be like to have the experience of using their products. I think that means, among other things, that if retail stores didn’t exist already they would probably need to be invented to give consumers the opportunity to experience goods before they buy them.
Coming back to market failure, does the fact that some consumers buy goods cheaply online after visiting a retail outlet constitute a market failure? I don’t think so, even though such behaviour is evidence of positive spillovers associated with retailing. Manufacturers will work out before long that retailers provide them with a useful service by enabling consumers to experience their products in real life and think up some way to encourage ongoing provision of that service.
Health care in the USA is completely broken. Health care is a difficult problem, to be sure, but I think it’s clear that we’re currently solving it very badly. Two problems with health care: One is that people expect everyone to have the same health care as a rich person, even if they’re not rich themselves. Another is that health care, not being exposed to the discipline of the market, is very expensive. If everyone gets the same health care as a rich person, then there is no pressure to create more frugal health care.
Health care then being expensive, everyone expects somebody else to be paying for their health care. This creates bizarre solutions. For example, the Canada, health care is paid by the federal government. In order to hold down taxes, access to health care is limited; typically by waiting periods. Or in the USA, most working people have
their health care paid by their employer, except for a very small deductible. This makes it difficult for employees with health problems to switch employers. The government has created a ham-handed solution which permits former employees to continue their health insurance by paying the premium out of pocket.
Health care is important, without doubt. So is food (insufficient calories reduces your resistance to ordinary infections), but we generally don’t expect everyone to be able to dine on caviar and steak every day. Many different kinds of food are available in many different venues and preparation styles, at reasonable prices. Yes, the poor may need to dine on beans and rice, but except for the most indigent, everyone can get enough calories, protein, and vitamins to stay healthy. Health care could be the same way; with cheap, worthwhile health care being available to everyone at affordable prices. We have chosen a different path; much to our detriment.
There is a lot of talk these days about the evils on unrestrained laissez-faire. There have been market meltdowns, business failures and tremendous losses for businesses and individuals. I have to agree that markets have failed. The real failure, however, has been that free markets have failed to exist for many decades.
A free market means that buyers and sellers can trade on any terms that they find mutually beneficial. They can trade whatever they want with whoever, whenever, however and why ever they want to. As long as fraud or coercion is not involved in the transaction, both sides trade because they believe they will be better off after the trade. It is a positive sum game.
The free market is based on property rights. People can use their property and dispose of it in any way that does not infringe on the rights of other people. Property rights are the key to economic progress in any country. Lack of strong property rights and economic freedom is the reason that less developed countries remain less developed.
The economic understanding of market failure is any situation where the allocation of goods and services in an economy is not efficient or optimized. The popular view is that any result in society that we don’t like is caused by market failure. Thus, depressions, pollution, homelessness, and shortages are examples of the infinite variety of things that can be blamed on markets.
There are many cases where the problem is a lack of adequate protection of property rights. In the case of pollution, people who’s property rights are infringed by the polluter should have the right to sue for damages. An appropriate justice system would make it expensive for a business to pollute or do other bad things because of the money it would have to pay to people who’s well being and property they damage.
The main problem with the market failure concept is the belief that benevolent politicians and bureaucrats should save the day. This approach has been energetically followed, but the reality is that the failures of government dwarf any failures of any market. In practically all cases, events that are demonized as market failures are the unforeseen and unintended consequences of prior government intervention in the markets, interventions that are invisible to everyday consumers.
The chain reaction will follow a few well worn paths. One such path is when someone perceives that prices are too high. Government then imposes price controls. The inevitable result of price controls is shortages. That means that rationing must be implemented. Black markets develop to supply the needs of consumers who can’t get what they want. Government programs are implemented to stamp out black markets, which invariably infringe on the rights of everyone. The string of cause and effect can go on for decades.
Another path may be when someone perceives that their income is too low. Government programs, such as the Agricultural Adjustment Act of the 1930’s and its many successors up to today, may destroy product and productive resources to keep prices high, subsidize the non production of crops and livestock, impose high tariffs and other protective measures. The net result is higher prices and a lower standard of living for all those not privileged enough to be in the protected industry. The protections and higher profits draw more people into production or discourage inefficient producers from leaving. The new producers increase production more, requiring further interventions.
These cause and effect chains can be followed in numerous industries, such as oil and gas, housing, banking and finance, agriculture, health care, automobile, and so on. When seen in isolation, an event looks like a random development. When taken together, they display a fairly understandable chain of events, emanating from some original intervention. The sad fact is that, even though this country is nominally free, and is still one of the more free nations , there is not one market that is not subject to massive government intervention at some level, national, state or local.
The current mortgage crisis and market meltdown are the unintended consequences of government induced inflationary credit, artificially low interest rates, lending and housing regulations and, in general, the lack of free markets in banking, housing and money creation. The present interventions of massive liquidity injections to preferred players in the market will have predictable consequences down the road. When those consequences come home to roost, people will forget about the cause of the failure and only blame the markets that failed by not being free.