Relevant Causality

Abstract

Abstract A recurring theme in the literature on externalities is that of uncovering the causes of market failure. Although this is a central concern in the general-equilibrium approach, it is also an issue with the phenomenological characterizations when absence of property rights or consent are viewed with an eye to their effects. Is the non-existence of property rights a cause of market failure? Is the non-existence of markets a cause of market failure? It has been argued that the ultimate cause of market failure cannot be any institution, but the cost associated with institutions, that is the presence of transaction costs. Both Bator (1958) and Arrow (1969) treated the presence of high transaction costs as a cause of market failure. I argued that the simple presence of high transaction costs impeding the formation of property rights or markets was not sufficient for failure. It could be that no property rights should be assigned or enforced in the case in question, and this would be optimal. Lack of market or high transaction costs would not necessarily imply failure, On the other hand, if market institutions were present when other non-market institutions could allocate resources better, or at less organizational cost, then this would be market failure. The market would fail relative to other organizational modes.