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Clearing up some confusion about ‘market failure’

January 27th, 2012 Posted in Uncategorized by

Nick Clegg thinks that the “short-termism and recklessness [that] eventually consumed our banks, taking the whole economy to the edge of a cliff” is an example of “market failure”.

For David Cameron, it is a sign of “a market failure [that] between 1998 and 2010 the average pay of FTSE executives [went] up four times”.

While for Ed Milliband, there is a “the market failure in the finance gap for SMEs that want to expand.”

All three make a common and simple mistake: they believe that market success is defined by a number of uneconomic measures such as social justice, or even (that ultimate weasel-word) fairness, and that it is a sign of market failure if market participants (that is to say, you and I) do not act in a way that the politicians think is appropriate for a market actor.

But that isn’t what market failure means at all. Market failure is a clearly defined economic term, and it has nothing to do with whether we get the outcomes that we want.

I explain this in more detail in my latest article for the Institute of Economic Affairs. Please visit their site to read more and to leave your comments.

Shocking market failure as woman rejects apricots

2 Responses to “Clearing up some confusion about ‘market failure’”

  1. Jim Says:

    I’m having a bit of trouble with the links.


  2. Tom Papworth Says:


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