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Are Consumer Decision-Making Phenomena a Fourth Market Failure?

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  • Peter Lunn

Abstract

This paper challenges the increasingly common view that the findings of behavioural economics constitute a fourth type of market failure. It shows how many behavioural phenomena, while they do imply departure from the standard competitive market model, undermine the use of this idealized model for policy analysis. A case study of the three-part tariff illustrates two problems: the validity of inferring that consumers’ choices after an intervention are superior to previous choices and the potential for distributional consequences when policy alters choice. These issues make behavioural phenomena fundamentally different from the standard market failures, as the deductive theoretical framework can no longer provide criteria to determine whether a policy improves consumer welfare. Thus, conceiving of behavioural phenomena as another form of market failure is to underestimate their implications for policymaking. Copyright Springer Science+Business Media New York 2015

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  • Peter Lunn, 2015. "Are Consumer Decision-Making Phenomena a Fourth Market Failure?," Journal of Consumer Policy, Springer, vol. 38(3), pages 315-330, September.
    • Handle: RePEc:kap:jcopol:v:38:y:2015:i:3:p:315-330
    DOI: 10.1007/s10603-014-9281-1
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    2. Francesco Bogliacino & Cristiano Codagnone & Giuseppe A. Veltri, 2016. "An introduction to the special issue on “the behavioural turn in public policy: new evidence from experiments”," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 33(3), pages 323-332, December.

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    More about this item

    Keywords

    Market failure; Decision-making biases; Behavioural economics; Regulation;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection
    • L96 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Telecommunications

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