Market Failure Paradigm Research Articles

Monetary architecture and the Green Transition

How to finance the Green Transition toward net-zero carbon emissions remains an open question. The literature either operates within a market-failure paradigm that calls for carbon taxes or cap-and-trade to help markets correct themselves, or via war finance analogies that offer a “triad” of state intervention possibilities: taxation, treasury borrowing, and central bank money creation. These frameworks often lack a thorough conceptualization of endogenous credit money creation and disregard the systemic and procedural dimensions of financing the Green Transition. We propose “Monetary Architecture” as a more comprehensive framework that perceives the monetary and financial system as a constantly evolving and historically specific hierarchical web of interlocking balance sheets. Using the United States as a case study, we stress the importance of a systemic financing dimension that uses all available elasticity space in the monetary architecture while considering a division of labor between firefighting balance sheets such as central banks or treasuries and workhorse balance sheets such as off-balance-sheet fiscal agencies or shadow banks. Procedurally, public workhorses should provide an initial balance sheet expansion and crowd in the rest of the monetary architecture, notably shadow banks, for long-term funding. Firefighters should prevent systemic instability and manage a possible final contraction.

State Aid for Independent News Journalism in the Public Interest? A Critical Debate of Government Funding Models and Principles, the Market Failure Paradigm, and Policy Efficacy

This study critically reviews scholarly debates on state aid for independent, professional news journalism in the public interest, its funding models and principles, the market failure paradigm, and policy efficacy. State aid is handed out by government agencies which believe that their support can help independent, professional journalism thrive in the digital, mobile, and platform-dominated future. Government support mainly comes as direct financial grants or indirect tax offsets. It aims at engendering economic opportunity and prosperity, while safeguarding journalistic independence and quality of output. Ideally, this shall foster the production, distribution and consumption of original and high-quality news in the public interest, which, in turn, shall keep people informed, facilitate public debate, and hold power to account. Still, this study finds arguments that government funding models for independent journalism in the public interest are limited by several critical challenges that endanger their principles, do not avert failure in the news media market and prevent effective policy governance. These deficits may even be exacerbated in the digital era.

‘Market failure’ arguments are a poor guide to policy

Abstract‘Market failure’ is frequently offered as a justification for government intervention in the economy. Proponents of interventions can point to almost limitless examples of markets which do not meet all the criteria for Pareto optimality and argue that government taxation, subsidies or regulation can perfect them, maximising social welfare. But comparing market outcomes with an unattainable and unidentifiable ideal is not useful in a world of imperfect knowledge and government failure. It is better to compare market outcomes against realistic alternatives. Furthermore, even within the market failure paradigm, concepts such as ‘public goods’ and ‘negative externalities’ are routinely misunderstood and inconsistently applied. This leads to predictably poor policy outcomes.

Science and Technology Policy in Latino America Countries: A Panel Data approach


 This paper analyzes science and technology policy in Latino America. Making use of panel data methods, we test for successful science and technology policy, and sup­porting innovation practices in Argentina, Brazil, Chile and Mexico. There are three paradigms that explain science and technology policy: the market failure paradigm, the mission paradigm, and the cooperative technology paradigm. The market failu­re paradigm assumes that market mechanisms will lead to optimal rates of science production and technical change. The mission technology paradigm assumes that governments may play an important role in the programmatic mission of agencies. The cooperative technology policy paradigm assumes that markets are not always the most efficient route to innovation. The results suggest that there is room for go­vernment involvement when defining a science and technology policy that aims to support the development of innovative capabilities. We conclude that mission and/ or the cooperative technology paradigms are adequate for defining a successful scien­ce and technology policy in Latino America.

Expanding the solution set: Organizational economics and agri-environmental policy

The market failure paradigm dominates agri-environmental research and policy. Organizational economics provides an alternative framework for analyzing agri-environmental problems and points to alternative solutions. In this paper, the traditional approach of creating markets for environmental goods and services is critiqued and set aside to provide space for an organizational analysis. From an organizational perspective, the relationship between the state and agricultural agents is viewed as grounded in an over-arching exchange relationship including elements of cooperation and trust. Such a collaborative exchange relationship may prove useful in supporting exchange between agricultural agents and the state leading to the provision of ecological goods and services. Highlighting the potential of organizational economics, the analysis suggests that agri-environmental research and policy go further in accounting for, and investigating, the unique organizational modes of exchange governing the production of food, fiber, and ecological goods and services.

From market failure paradigm to an institutional theory of environmental governance

- This manuscript examines how an institutional theory of environmental governance might be based on a re-interpretation and re-working of the arguments of the market failure paradigm and its main criticisms. The manuscript first examines in detail the arguments of the market failure paradigm regarding externalities and public goods, as well as their criticisms. The paper then suggests an institutional re-interpretation and revision of the key arguments of the market failure paradigm. The institutional theory of environmental governance acknowledges the interdependence of economic actors and the resulting fundamental role of conflicts as the rationale for environmental governance and its institutions. As environmental conflicts are primarily a matter of distribution rather than of efficiency, it becomes important to understand the likely consequences of institutional alternatives in the specific socio-economic and physical setting of the environmental conflicts, and the degree to which these consequences match with the pertinent social or economic goals.Keywords: environmental governance, market failure, externalities, public goods, welfare economics, institutional economicsJEL classifications: Q50; H41; D62; B52

A Comparative Examination of Cultural Change Within the Australian and New Zealand Treasuries

Manifold similarities between Australia and New Zealand provide social scientists with unique opportunities for comparative analyses of the two countries. In this paper, we attempt to explain cultural change within their respective Treasuries in terms of their secretaries’ use of agenda-setting, strategic recruitment and “expression games.” A different institutional context allowed the New Zealand Treasury (NZT) to exercise a more dominant influence than the Australian Treasury (AT), although the Post-War hegemony of a market failure paradigm meant that it was deeply influential in both agencies. The erosion of the authority of this paradigm in the 1980s induced significant “cultural re-invention” in both Treasuries as they aligned themselves with reformists committed to policies derived from the government failure paradigm. The stronger reaction to the alignment of the more dominant NZT has placed it under more pressure than the AT to reinvent itself again in the 1990s.

Institutional Arrangements to Improve Water Quality in Irrigated Agriculture 1

Irrigated agriculture is closely linked to water quality problems throughout the western United States. In this paper it is argued that the market failure paradigm is not adequate as an environmental policy guide, especially for water quality problems involving individual irrigators. An alternative stewardship paradigm is developed and applied to nitrate pollution of groundwater in central Nebraska. This paradigm holds that producers are not profit maximizers, that information is imperfect and that producers care enough about the environment to voluntarily substitute some environmental quality for income. The analysis suggests that education can produce significant improvements in environmental quality, and that in some circumstances education may be more effective than regulations or incentive-based strategies.

The Theory of Market Failure and Equity-Based Policy Making in Contemporary Local Government

Over the past several decades local government has become increasingly complex. Accordingly, local government policy makers can no longer simply rely on intuitive reasoning in the formulation of policy and are now obliged to draw on conceptual frameworks developed in the social sciences, including economics. One such framework is the market failure paradigm which has previously focused exclusively on the question of economic efficiency and local public goods in its application to the local government milieu. This article seeks to extend this model to include sources of market failure which derive from questions of equity as well as efficiency.

Understanding Cultural Changes in an Economic Control Agency: The New Zealand Treasury

A “bureau-shaping model” is adapted to explain how the head of a control agency can shape its culture by agenda-setting, strategic recruitment and engaging staff in “expression games” through which their reputation depends on the impression they develop of competence and commitment to the core beliefs of the agency. The postwar shaping of a “culture of balanced evaluation” at the New Zealand Treasury (NZT) reflected the hegemony of a market failure paradigm. The NZT reinvented itself in the 1980s so that it would be aligned with a reformist advocacy coalition committed to impose and institutionalize a government failure paradigm. The accumulation of a number of threats to the NZT's authority appear to be prompting another reinvention as its current secretary seeks to bring it more into line with the appreciative leadership style of its centre-left government.

Market Failure, Government Failure, Leadership and Public Policy

The economic rationale for government intervention in a market economy has traditionally been provided by the theory of market failure. This article reviews the market failure paradigm in the light of the more recent literature on government failure. One implication of the theory of government failure is that a contractualist approach to public service reform is the best method of improving public sector productivity. However, we argue that this view overlooks the potentially crucial role of leadership in public agencies and the ways in which transformational leadership can stimulate efficiency. We argue that communitarian conceptions of leadership can be incorporated into conventional economic approaches, and that this can have significant implications for public policy formulation.

The Evaluation of Public Policy: Normative Economic Theories of Government Failure

Conventional economic analysis of public policy has been traditionally conducted in the conceptual context of the theory of market failure. The resultant analytical framework enabled analysts to assess the economic efficiency of market outcomes, and prescribe appropriate government intervention where necessary. No corresponding theoretical structure existed to facilitate an equivalent investigation into the economic efficiency of nonmarket outcomes. However, quite distinct from public choice theory, a normative theory of government failure has emerged to form a conceptual analogue to the market failure paradigm. At present this embryonic theory of government failure has three strands: Wolf’s theory of nonmarket failure, Le Grand’s theory of government failure, and Vining and Weimer’s theory of government production failure. The present paper evaluates the extent to which this seminal literature can assist in the design of rational public policy processes.

ECONOMIC THEORY AND POLICY ANALYSIS: CONCEPTUAL GUIDELINES FOR PUBLIC POLICY‐MAKERS

Abstract: Traditionally public policy analysis has been able to employ the conceptual framework offered by the theory of market failure in order to evaluate the efficiency of market outcomes. However, until fairly recently, no corresponding analytical structure existed which could facilitate the examination of the efficiency and equity characteristics of government or non‐market outcomes. Quite apart from public choice theory, an embryonic normative theory of government failure has now been developed which can act as a conceptual analogue to the market failure paradigm. At present, three theories of government failure coexist in the literature: Wolf's theory of non‐market failure; Le Grand's theory of government failure; and Vining and Weimer's theory of govern‐ ment production failure. These models form the basis for a more universal theory of government failure. Nevertheless, in its current state of development this seminal literature can still assist in rational public policy design subject to certain caveats. Foremost amongst these is the need for policy analysts to augment the efficiency and equity criteria with some additional broader normative measures, and the necessity for care to be taken in the use of allocative efficiency as a benchmark in non‐market circumstances.