The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Market Failure

  • John O. Ledyard
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_1052

Abstract

Market failure occurs when there are too few markets, non-competitive behaviour, or non-existence, leading to inefficient allocations. Many suggested solutions for market failure, such as tax-subsidy schemes, property rights assignments, and special pricing arrangements, are simply devices for the creation of more markets. This remedy can be beneficial but, if the addition of markets creates either non-convexities or thin participation, then adding markets will simply lead to market failure from monopolistic behaviour. Examples are natural monopolies and informational monopolies. To achieve a more efficient allocation of resources in the presence of such fundamental failures one must explore non-market alternatives.

Keywords

Asymmetric information Contingent claims markets Free rider problem Fundamental theorem of welfare economics Increasing returns to scale Lindahl prices Market failure Mechanism design Monopoly Monopsony Natural monopoly Non-competitive behaviour Non-convexity Non-existence of equilibrium Pareto efficiency Property rights reassignments Rational expectations 
This is a preview of subscription content, log in to check access

Bibliography

  1. Arrow, K. 1951. An extension of the basic theorems of classical welfare economics. In Proceedings of the second Berkeley symposium on mathematical statistics and probability, ed. J. Neyman. Berkeley: University of California Press.Google Scholar
  2. Arrow, K. 1969. The organization of economic activity: Issues pertinent to the choice of market versus non-market allocation. In Joint Economic Committee, The Analysis and Evaluation of Public Expenditures: The PPB System. Washington, DC: Government Printing Office.Google Scholar
  3. Bator, F. 1958. The anatomy of market failure. Quarterly Journal of Economics 72: 351–379.CrossRefGoogle Scholar
  4. Coase, R. 1960. The problem of social cost. Journal of Law and Economics 3: 1–44.CrossRefGoogle Scholar
  5. Debreu, G. 1959. Theory of value: An axiomatic analysis of economic equilibrium. Cowles Foundation Monograph No. 17. New York: Wiley.Google Scholar
  6. Foley, D. 1970. Lindahl’s solution and the core of an economy with public goods. Econometrica 38: 66–72.CrossRefGoogle Scholar
  7. Green, J. 1977. The nonexistence of informational equilibria. Review of Economic Studies 44: 451–463.CrossRefGoogle Scholar
  8. Groves, T., and J. Ledyard. 1986. Incentive compatibility ten years later. In Information, incentives, and economic mechanisms, ed. T. Groves, R. Radner, and S. Reiter. Minneapolis: University of Minnesota Press.Google Scholar
  9. Hurwicz, L. 1972. On informationally decentralized systems. In Decision and organization, ed. C.B. McGuire and R. Radner. Amsterdam: North-Holland.Google Scholar
  10. Kreps, D. 1977. A note on ‘fullfilled expectations’ equilibria. Journal of Economic Theory 14: 32–43.CrossRefGoogle Scholar
  11. Ledyard, J. 1976. Discussion of ‘on the nature of externalities’. In Theory and measurement of economic externalities, ed. S. Lin. New York: Academic Press.Google Scholar
  12. Muth, J. 1961. Rational expectations and the theory of price movements. Econometrica 29: 315–335.CrossRefGoogle Scholar
  13. Pigou, A. 1932. The economics of welfare. 4th ed. New York: Macmillan.Google Scholar
  14. Postlewaite, A., and D. Schmeidler. 1986. Differential information and strategic behavior in economic environments: A general equilibrium approach. In Information, incentives, and economic mechanisms, ed. T. Groves, R. Radner, and S. Reiter. Minneapolis: University of Minnesota Press.Google Scholar
  15. Radner, R. 1968. Competitive equilibrium under uncertainty. Econometrica 36: 31–58.CrossRefGoogle Scholar
  16. Roberts, J., and A. Postlewaite. 1976. The incentives for price-taking behavior in large exchange economies. Econometrica 44: 115–127.CrossRefGoogle Scholar
  17. Scitovsky, T. 1954. Two concepts of external economies. Journal of Political Economy 62: 70–82.CrossRefGoogle Scholar
  18. Starrett, D. 1972. Fundamental non-convexities in the theory of externalities. Journal of Economic Theory 4: 180–199.CrossRefGoogle Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • John O. Ledyard
    • 1
  1. 1.