Howare marketfailuresaddressed?TechnischeUniversiteitTUEindhoveneUniversity of Technology9/23/2013PAGE10EconomicsofInnovation2013
How are market failures addressed? Economics of Innovation 2013 9/23/2013 PAGE 10
AframeworkforpolicyinterventionNOIsthereasociallypreferableoutcome?YESYESDoesthemarkettendtoNo interventionnecessaryMonitoreffectivenessof thedeveloptothatoutcome?roleofthegovermmentNONODothebenefitsfollowfromtheinterventionexceeditscosts?YESIntervention is justifiedSource:DGET,2007Technische UniversiteitTUEindhoveneUniversity of TechnologyEconomics119/23/2013ofInnovation2013
9/23/2013 Economics of Innovation 2013 11 A framework for policy intervention Does the market tend to develop to that outcome? Is there a socially preferable outcome? No intervention necessary Monitor effectiveness of the role of the government Do the benefits follow from the intervention exceed its costs? Intervention is justified NO NO NO YES YES YES Source: DGET, 2007
Market failure and the underlyingeconomicapproachBasedonneo-classical frameworkaimedat providingremediesincase of marketfailure:Firststep:Defining whetherornotthereisamarketfailureSecond step:Defining the remediesforthe marketfailureThirdstep:Undertakinga(social)cost-benefitanalysistoexamineif it wouldbe costefficientto interveneinthemarketFourthstep:Implementationoftheremedy(ifnecessary)Fifthstep:Toevaluatewhetherornottheremedywasefficient(ifimplemented).Again:Whatisthe underlying economic model of themarket?Technische UniversiteitTUEindhovenUniversityofTechnologyPAGE12EconomicsofInnovation20139/23/2013
Market failure and the underlying economic approach • Based on neo-classical framework aimed at providing remedies in case of market failure: • First step: Defining whether or not there is a market failure • Second step: Defining the remedies for the market failure • Third step: Undertaking a (social) cost-benefit analysis to examine if it would be cost efficient to intervene in the market • Fourth step: Implementation of the remedy (if necessary) • Fifth step: To evaluate whether or not the remedy was efficient (if implemented). • Again: What is the underlying economic model of the market? Economics of Innovation 2013 9/23/2013 PAGE 12
Addressing market failureIdentify the agents in marketMarketoutcomesufficient.Do“firms"generateAre thereanydifferencessufficientinvestment andbetweenincumbentandinnovationontheir own?new entrant firms?Are“consumers”Whichconsumers areworseoff?satisfied with the currentallocation?Technische UniversiteitTUEindhovenUniversity of TechnologyPAGE13EconomicsofInnovation20139/23/2013
Addressing market failure Market outcome sufficient • Do “firms” generate sufficient investment and innovation on their own? • Are “consumers” satisfied with the current allocation? Identify the agents in market • Are there any differences between incumbent and new entrant firms? • Which consumers are worse off? Economics of Innovation 2013 9/23/2013 PAGE 13
Neo-classicaleconomicviewofthemarketMarket is in equilibrium(static view)Marketsarefunctioning perfectly inprovidingfullinformation on prices and reflect cost structures offirmsNofirmstrategiesinvolvedNomarketdynamics(interactionbetweenfirms)(Extreme:Chicagoschool:only partyresponsibleforfailure in the market is the government, market poweris atemporaryphenomenon as market dynamics willerodemonopolyprofitsovertime)TechnischeUniversiteitTUEindhovenUniversityofTechnologyEconomicsofInnovation20139/23/2013PAGE14
Neo-classical economic view of the market • Market is in equilibrium (static view) • Markets are functioning perfectly in providing full information on prices and reflect cost structures of firms • No firm strategies involved • No market dynamics (interaction between firms) (Extreme: Chicago school: only party responsible for failure in the market is the government, market power is a temporary phenomenon as market dynamics will erode monopoly profits over time) Economics of Innovation 2013 9/23/2013 PAGE 14