The Transaction-cost Roots of Market Failure

Todorova, Tamara (2014): The Transaction-cost Roots of Market Failure.

Abstract

Our purpose is to reveal the transaction cost character of the different forms of market failure where transaction costs are defined as the costs of using the market mechanism, what it costs to organize market exchange or overcome the obstacles to an efficient market process. The paper thus inevitably attempts at defining market failure in this new context. It also studies market power, externalities, opportunism and informational asymmetries as the different forms of market failure from the perspective of transaction cost theory. We discuss public goods and the role of the state in overcoming the marketing costs of private transacting. This role would be stronger in economic systems faced with sizable transaction costs and thus more prone to market failure where market failure becomes a true obstacle for economic development.

• Item Type: MPRA Paper
• Language: English
• Keywords: transaction costs, market failure, economic development
• Subjects: P - Economic Systems > P1 - Capitalist Systems; P - Economic Systems > P1 - Capitalist Systems > P16 - Political Economy; P - Economic Systems > P2 - Socialist Systems and Transitional Economies > P26 - Political Economy ; Property Rights

References

1. Akerlof, G. A. (1970). “The Market for “Lemons”: Quality Uncertainty and the Market Mechanism.” The Quarterly Journal of Economics, 84(3): 488-500.

2. Arrow, K. J. (1969). “The Organization of Economic Activity: Issues Pertinent to the Choice of Market versus Nonmarket Allocation” in The Analysis and Evaluation of Public Expenditures: The PBB System, Joint Economic Committee, 91st Cong., 1st sess., vol.1. Washington, D.C.: Government Printing Office.

3. Banfield, E. C. (1958). The Moral Basis of a Backward Society. The Free Press.

4. Barzel, Y. (1985). “Transaction Costs: Are They Just Costs?” Journal of Institutional and Theoretical Economics, 141: 4-16.

5. Bator, F. M. (1958), “The Anatomy of Market Failure,” The Quarterly Journal of Economics, Vol. 72, No. 3 (August), pp. 351-379.

6. Demsetz, H. (1982). Barriers to Entry. American Economic Review, March, No. 72, pp. 45-57

7. Coase, R.H. (1937), “The nature of the firm”, Economica, New Series, Vol. 4, pp. 386-405.

8. Coase, R.H. (1960), “The problem of social cost”, Journal of Law and Economics, Vol. 3, pp. 1-44.

9. Crampton, E. (2007). “Market Failure.” in Clark, David S., Ed., Encyclopedia of Law & Society. Sage Publications, pp. 983-985

10. Gillman, M. (1999), “The problem of social cost: the role of the state”, International Journal of Social Economics, Vol. 26, No. 5, pp. 590-595.

11. Knight, F. H. (1965), Risk, Uncertainty and Profit. New York: Harper & Row.

12. Samuelson, P.A. (1976), “Economics of forestry in an evolving society”, Economic Inquiry, Vol. 14 No. 4, pp. 466-492.

13. Simon, H. (1961). Administrative Behavior. 2nd ed. Macmillan: New York. Original publication: 1947.

14. Stiglitz, J. E. (2002), There Is no Invisible Hand, The Guardian, December 20, 2002

15. Toumanoff, P. G. (1984), A Positive Analysis of the Theory of Market Failure, Kyklos, Vol. 37, No. 4, pp. 529-541

16. Williamson, O. E. 1985. The Economic Institutions of Capitalism. The Free Press: New York.

17. Williamson, O. E. (1972). “Dominant Firms and the Monopoly Problem: Market Failure Considerations,” Harvard Law Review, Vol. 85, pp. 1512-1531

18. Williamson, O. E. (1971). “The Vertical Integration of Production: Market Failure Considerations,” American Economic Review, May, Vol. 61, No. 2, pp. 112-123

19. Williamson, O. E., (1968). “Economies as an Antitrust Defense: the Welfare Tradeoffs,” American Economic Review, March 1968, 58, pp. 18-36