September 11, 2019

Is Market Failure a Sufficient Condition for Government Intervention?

My #Thoughts on this piece

I agree that in order to justify government intervention, you would want some reason to believe that the intervention will be better than the market + failure.

It seems to me that the most likely way this could be false is that the intervention causes some unintended consequence, either in future or in other parts of the system. But something like Pigovian taxes seems like a plausible-enough government intervention that I would shift the burden of proof onto those arguing that it is a bad idea to explain what these consequences could be.

In this piece, the authors don’t seem to adequately criticize plausible government solutions to market failures, instead just falling back on the idea that government intervention needs to result in a better state than the market + failure.

In the section on natural monopolies, the authors claim that because of the existence of Bing, Google is not a natural monopoly, and because of the existence of other social media sites, Facebook is not a monopoly. Perhaps this is true in the most technical use of the term natural monopoly, but in practice, very few people use anything other than google for search (at least in the West) and the network effects mean many people are drawn to use Facebook even though they’d prefer to use something else. Failing to acknowledge that many consumers really do feel restricted and concerned about market power seems somewhat disingenuous.

Moreover, many current government interventions that people use such arguments to justify were originally based on private, self-serving interests and not on the public good. Consider the supposed failure of the market for information in the medical field. As Milton Friedman argued, medical licensing raises the incomes of incumbent doctors at the expense of consumers. Economist Morris Kleiner has shown that this is true for many licensed occupations.

Less-than-virtuous motivations don’t necessarily discredit the utility of an action or intervention (e.g. many corporate responsibility programs are ultimately motivated by increasing profit by gaining consumer approval). The fact that some government interventions were motivated by self-serving interests does cause me to be suspicious of them, but it isn’t sufficient to discard them. The example given regarding medical licensing may well have given doctors higher income at the expense of the consumer, but it has also reduced the risk that consumers are harmed due to the actions of cowboy doctors. I predict that most consumers consider this a worthwhile trade-off.

I think it’s true that many people advocating for government intervention do so without a full understanding of the technical market failure terms and without deep consideration of the potential unintended consequences or other effects, so I’m glad that this piece helps lay these out. However, I would like to see more convincing arguments against specific government interventions that genuinely seem like an improvement on the market failure, rather than the general argument of but you don’t know if this is actually better!’

Part of the argument seems to be markets aren’t perfect!’, and that we should be trying to reach some theoretical ideal. But it doesn’t follow that we shouldn’t at least try to improve them with the tools we have! It is true that political processes are not perfect either, but it seems very plausible to me that by carefully analyzing the ways in which both fail and strategically using them to counteract each others failures, we could reach something better than each could achieve in isolation.

Updated Jul, 03 2020

#economics #Role-of-government #Markets