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A Positive Analysis of the Theory of Market Failure

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  • Peter G. Toumanoff

Abstract

Implications of inefficiency in theories of market failure reveal a flawed methodology. Behavior which is apparently inefficient is actually the symptom of an inappropriate analytical model. The standard examples of market failure, monopoly power and external effects, are forthcoming only from models which omit transactions costs as explanatory variables. The unfortunate consequence of this conclusion is that complete and appropriate economic models, which incorporate all relevant variables, will always certify any behavior as efficient. This poses the ‘Panglossian dilemma’, that whatever is, is optimal. This dilemma is resolved by an analytical approach which compares behavior under alternative economic institutions. This analysis depends on two propositions: that transactions costs are affected by alternative institutional environments; and that institutions are themselves responses to the existence of transactions costs. These propositions are used to predict behavior under alternative institutions, and to explain the long run evolution of the institutions. Das Erkennen von Ineffizienz in der Theorie des Marktversagens deckt eine fehlerhafte Methodik auf. Scheinbar ineffizientes Verhalten ist in Wirklichkeit Zeichen für ein ungeeignetes analytisches Modell. Die typischen Beispiele von Marktversagen, Monopole und externe Effekte, treten nur in Modellen auf, welche die Transaktionskosten als erklärende Variable nicht berücksichtigen. Die unselige Folge dieses Schlusses ist, dass in vollständigen und geeigneten Modellen, welche alle relevanten Variablen einbeziehen, jedes Verhalten als effizient erscheint. Er stellt sich das ≪Dilemma des Pangloss≫: Alles was existiert, ist optimal. Dieses wird mittels eines analytischen Ansatzes gelöst, welcher Verhalten unter verschiedenen institutionellen Bedingungen miteinander vergleicht. Die Analyse basiert auf zwei Annahmen: Transaktionskosten werden von der jeweiligen institutionellen Umgebung beeinflusst, und die Institutionen sind selbst Antworten auf die jeweiligen Transaktionskosten. Diese Annahmen werden zur Vorhersage des Verhaltens in verschiedenen institutionellen Rahmen sowie zur Erklärung der langfristigen Entwicklung des Institutionen verwendet. Les implications d'inefticacité en théories de l'échec du marché révèlent une méthodologie inexacte. Le comportement qui est apparemment inefficace est, é vrai dire, le symptome d'un modèle analytique qui ne convient pas. Les exemples types de l'échec du marché, du monopole et des effets externes, sont tout pȩkts ȩ parai̧tre seulement des modèles qui omettent les cou̧ts de transactions comme des variables explicatives. La conséquence malheureuse de cette conclusion est que les modèles économíques complets et convenables, qui incorporent toutes les variables pertinentes, certifieront toujours n'importe quel comportement comme è propos. Cela pose ≪le dilème panglossien≫, que tout ce qui existe est idéal. Ce dilème est résolu par une approche analytique qui compare le comportement sous des institutions èconomiques alternatives. Cette analyse dépend de deux propositions: que les cou̧ts de transactions sont affectés par des environnements institutionnels alternatifs, et que les institutions sont, elles‐mȩmes, des réponses a I'existence des cou̧ts de transactions. Ces propositions sont employées pour prédire le comportement sous des ínstitutions alternatives, et d'expliquer I'évolution éventuelle des institutions.

Suggested Citation

  • Peter G. Toumanoff, 1984. "A Positive Analysis of the Theory of Market Failure," Kyklos, Wiley Blackwell, vol. 37(4), pages 529-541, November.
  • Handle: RePEc:bla:kyklos:v:37:y:1984:i:4:p:529-541
    DOI: 10.1111/j.1467-6435.1984.tb00757.x
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    Cited by:

    1. Huashu Wang & Tian Xia & Zhengfei Guan, 2019. "Market power and food safety in the China pork industry," Agribusiness, John Wiley & Sons, Ltd., vol. 35(1), pages 97-113, January.
    2. Todorova, Tamara, 2015. "The Transaction-Cost Roots of Market Failure," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 0(1(11)), pages 30-44.
    3. Yijuan Jiao & Mou Leong Tan & Fei Zhang, 2023. "Factors Influencing the Roles of Environmental Non-Governmental Organizations (ENGOs) on Environmental Bargaining in Yunnan, China," Sustainability, MDPI, vol. 15(5), pages 1-21, February.
    4. Kamath Shyam J., 1994. "Privatization: A Market Prospect Perspective," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 5(1), pages 53-104, March.
    5. J.A. den Hertog, 2010. "Review of economic theories of regulation," Working Papers 10-18, Utrecht School of Economics.
    6. Kartali, Janos, 1993. "Changes in our agricultural trading with the Eastern European region with special regard to mediation trade," Studies in Agricultural Economics, Research Institute for Agricultural Economics, vol. 81.
    7. Cedric D. Nathan & Zane A. Spindler, 1993. "Squatting as Rent-seeking and Pressure-group Competition: A South African Case-Study," Urban Studies, Urban Studies Journal Limited, vol. 30(3), pages 477-494, April.

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