37 "Market" failure

Do we talk about “sun failure” when the sun comes up 30 minutes later in winter than in summer? IMPERFECT INFORMATION Just as the sun is not failing us, the market is not failing us when consumers do not have ALL the information available when making a decision. In the normal run of events they will have gathered sufficient information, taking into account the cost (time, money and effort) to do so – whether purchasing a car, selecting a medical practitioner, an estate agent on toothpaste. By calling anything less than the availability of perfect information a market failure opens the door for the government to step in and rectify the “failure”. An action that will cause many more unseen losses and never called “government failure” If we accept that there is a cost attached to obtaining the information – just as the purchaser of any share on the JSE will tell you - then it is clear that that is the way that the world works. Consumers will take the necessary actions to satisfy themselves to the degree that they need to, for them to be comfortable with the decisions that they are taking. Some people need less information and some more – the market normally adjusts to that need. If the Government steps in and arbitrarily sets some packaging contents rules for example – which places a cost burden on manufacturers and suppliers, they put the smaller suppliers, whose only advantage was that they were able to undercut more established suppliers, out of business. These suppliers were also supplying to a market that did not want the requirement in the first place – their customers might not even been able to read! Now they have to pay more for a product that they were able to get cheaper previously. Often these interventions are not beneficial to the poor. In the end the market works best if left alone to deliver maximum individual choice, both from the point of view of the consumer and the supplier. The market is perfectly suited to meet even the informational needs of consumers if the consumer is prepared to pay for it and to do it without government intervention. MARKETS OPERATE IN THE REAL WORLD The notion of “market failure” is based on a theoretical model of “perfect market conditions” (Similar to when the sun “fails” if there is not perfect weather conditions). So far the focus was related to the sufficiency of information. Another prerequisite of the “perfect market is that the information flows instantaneously”. This time lag is impossible to fulfil even in the most sophisticated market systems (price information on the world’s stock and commodity training platforms – as soon as the current price of the most recent trade appears, it is superseded by the next, and the next. The market is not a static event, it is the dynamic process where price levels continuously get adjusted through the supply and demand forces that are interacting. Equilibrium is attained at every point a transaction takes place – and that is at a point that may be the same as the previous transaction, but it may be at a higher or may be at a lower point, depending on the participants in the next transaction. This is not market failure, this time lag is the market. LAGS IN ECONOMIC ADJUSTMENT The second instance of market failure are the lags in economic adjustments. The textbook puts it this way: “Most markets do not adjust very rapidly to changes in supply and demand.” Now this is patently not true – markets adjust at the speed the participants want to change. If there is a change in consumer preference from fixed line communications to cellular communications, that change will be as fast as the participants want to change. There are still individuals that are installing fixed line telephones even today and there may still be for the next 100 years – even though cellular communications may be more convenient and even cheaper. The lag is market driven! There are still people today that use ox wagons – it may be an economic necessity for them in their particular circumstances – there is nothing wrong with a lag. That is how things work - it cannot be labelled a market failure. (Just as the fact that it takes four minutes for the sun’s rays to reach the earth – it cannot be labelled “sun failure”!) In any other system, other than an unhampered market system, these lags will be even longer since the price mechanism will be clouded or absent. EXTERNALITIES This next market failure is a real failure - Market participants do not always fully account for the external costs associated with their actions. Companies that pollute do not in all cases pay for the negative consequences of their actions. The short answer is that they should. But, because the benefit is concentrated - the one company benefits and those that bear the costs are distributed - all the individual households that have to live with for example the smoke that waft over their properties, do not have individual incentive to lay a claim against the company - the cost is too high in relation to the individual benefit - so they bear it and the company gets away by not spending the money to clean up the pollution. If a company pollutes a stream that damages the recreational and irrigation potential of a river, the general taxpayer should not bear the cost, in these cases the Government then steps in with regulations, laws and fines. Carbon emission credits bought by companies is one mechanism that is used to mange the process and ensure that companies carry the full cost of their activities. Only in extreme cases should the taxpayer be expected to carry the cost. The incidence of acid water on the Witwatersrand is a case in point. The original mines and owners are long gone. The "benefits" of the mining has been distributed and is dispersed into society. The society now will have to pay for the rectification. The free market principle is that the consequences of an action should be borne by the actor. NON-COMPETITIVE MARKET CONDITIONS Another "market failure" is the existence of non-competitive market conditions which result in monopolies, oligopolies, monopsonies - (these occurs when a firm has market power in employing factors of production. A monopsony means there is one buyer and many sellers. This is a similar concept to monopoly where there is one seller and many buyers. Governments will again intervene through institutions such as the competition commission, regulations and fines. Again there are often more effective free market solutions if it becomes a problem. Often the solution lies in freeing up the economy rather than trying to regulate it. The reason in South Africa why we have such a rigid and Oligopolistic market in Banks, Cellphone companies, TV broadcast, Beer, Cement and other industries is because of existing laws and regulations that make it difficult to enter the market. Admittedly some industries are protected from competition by high start-up costs, but a huge part of the start up costs are the compliance cost to new companies apart from the legal prohibibtion that exist in many cases. Government protected state monopolies is major stumbling block and cause disasterous "goverment induced market failure". The electricity crisis is a very good example of this. Monoplies are not a "market failure" per se - take Microsoft as an example - they might be dominating the market in certain software today - they have attained the position through staying ahead of the pack and producing what consumers want at an affordable price. They will cease to retain that position if they fall behind - like many before them. KODAK, IBM, Ford Motor company and even De Beers are examples of organisations that may fit into this category. Macro-economic instability is cited as a market failure (Mancosa Economics 1B Study Guide). It says that markets left on their own are slow to react. Is this true? I believe that markets left on their own would correct themselves as fast as the participants want to. It is often governments that may not be able to face the political consequences if that were to happen - that is why the Chinese government stepped in and limited the trade in the shares trading on the Bejing Stock Exchange, that is why the US government viewed some banks as "too large to fail" INEQUALITY With regards to inequality as a market failure let it be suffice to say that North Korea may be more equal than South Korea. If that is seen as a market failure, then let the market fail in distributing poverty evenly. Under free market conditions the poor have never had it so good in countries that have moved towards economic liberalisation. It seems that the sun is shining bright onto those that dare to venture outside.

 C.M. Heydenrych 8.08.2015

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