Friends of markets, please stop using the term "market failure". Instead, use something like "coordination failure" or "collective action suboptimality." All institutions fails. Markets succeed vastly more than they fail; government institutions fails far more often than they succeed.
First, this only makes sense if one assumes that every market failure is essentially independent such that aside from it the world functions as an optimizing free market. Since, however the world does not, there is no general reason to believe that any of the individual ‘solutions’ will actually fix the specific problem in the imperfect situation we actually live in. You have to look at an individual case. So, for example, while in theory a pigovian tax is the right way to fix a negative externality, in the real world because of limited information and failures of perfect rationality they are super unpopular and generally fail, not to mention the friction of actually measuring and implementing them can cause way more economic losses than much simpler limits/controls.
Second, governments have other priorities than optimizing production and consumption! Yes, it is important, but the inference from: ‘this is not what my incredibly idealized model of an impossible world says we should do’ to ‘therefore the government is doing the wrong thing’ is, uh, not a strong one.
To the extent Bryan's analysis is absurdly oversimplified, it's because the standard model of market failure is absurdly oversimplified. He's just working within the logic of the model.
To your second point, yes indeed governments have other priorities than optimizing markets. Public choice theorists, like Bryan, have been arguing that for decades. But it is a point ignored by welfare economists, who argue for government intervention in markets *because* government's priority is to make markets optimal.
For the first point, we’re talking about two different types of questions. The existence of market failures prevents free markets from optimizing preference fulfilment. That’s a crucial theoretical result that speaks the same idealized language as the prior result that perfect free markets optimize. Bryan’s argument, however, is about what real governments do. And it is not very surprising that real governments don’t do the things that a very simple model says should work, because in the real world there’s no very good reason to think they WILL work given how far the real world diverges from the model assumptions.
Now, I am perfectly willing to grant the very milquetoast point that governments could do better at fixing market failures. But that does not really get us very far. Bryan’s interesting claim is ‘governments don’t generally do what the models say they should do to fix markets, and this shows that governments are also failing’. But does it? Because that assumes that the simple actions that are most efficient in the models are also the optimal actions in the real world and I think that inference just fails.
I know nothing of the debate between public choice theorists and welfare economists. But it seems to me like the welfare economist point needs to be made loudly and often because there are still rather too many people very confidently proclaiming that the market will solve everything if governments just stop messing things up.
I agree about how bad it is that governments help monopolies, though.
What's a negative externality of subsidized energy? In principle, not when it's generated by fossil fuels?
Also, there seems to be a larger non-sequitur in 1 and 2 but I can't explicitly formulate it, so will just bookmark it for later.
Also also, don't market theorems only promise favorable average, not low dispersion? The "phone book of regulations" is aimed, more or less explicitly, to lower the latter.
Friends of markets, please stop using the term "market failure". Instead, use something like "coordination failure" or "collective action suboptimality." All institutions fails. Markets succeed vastly more than they fail; government institutions fails far more often than they succeed.
Absurdly oversimplified.
First, this only makes sense if one assumes that every market failure is essentially independent such that aside from it the world functions as an optimizing free market. Since, however the world does not, there is no general reason to believe that any of the individual ‘solutions’ will actually fix the specific problem in the imperfect situation we actually live in. You have to look at an individual case. So, for example, while in theory a pigovian tax is the right way to fix a negative externality, in the real world because of limited information and failures of perfect rationality they are super unpopular and generally fail, not to mention the friction of actually measuring and implementing them can cause way more economic losses than much simpler limits/controls.
Second, governments have other priorities than optimizing production and consumption! Yes, it is important, but the inference from: ‘this is not what my incredibly idealized model of an impossible world says we should do’ to ‘therefore the government is doing the wrong thing’ is, uh, not a strong one.
To the extent Bryan's analysis is absurdly oversimplified, it's because the standard model of market failure is absurdly oversimplified. He's just working within the logic of the model.
To your second point, yes indeed governments have other priorities than optimizing markets. Public choice theorists, like Bryan, have been arguing that for decades. But it is a point ignored by welfare economists, who argue for government intervention in markets *because* government's priority is to make markets optimal.
For the first point, we’re talking about two different types of questions. The existence of market failures prevents free markets from optimizing preference fulfilment. That’s a crucial theoretical result that speaks the same idealized language as the prior result that perfect free markets optimize. Bryan’s argument, however, is about what real governments do. And it is not very surprising that real governments don’t do the things that a very simple model says should work, because in the real world there’s no very good reason to think they WILL work given how far the real world diverges from the model assumptions.
Now, I am perfectly willing to grant the very milquetoast point that governments could do better at fixing market failures. But that does not really get us very far. Bryan’s interesting claim is ‘governments don’t generally do what the models say they should do to fix markets, and this shows that governments are also failing’. But does it? Because that assumes that the simple actions that are most efficient in the models are also the optimal actions in the real world and I think that inference just fails.
I know nothing of the debate between public choice theorists and welfare economists. But it seems to me like the welfare economist point needs to be made loudly and often because there are still rather too many people very confidently proclaiming that the market will solve everything if governments just stop messing things up.
I agree about how bad it is that governments help monopolies, though.
What's a negative externality of subsidized energy? In principle, not when it's generated by fossil fuels?
Also, there seems to be a larger non-sequitur in 1 and 2 but I can't explicitly formulate it, so will just bookmark it for later.
Also also, don't market theorems only promise favorable average, not low dispersion? The "phone book of regulations" is aimed, more or less explicitly, to lower the latter.