Wednesday, October 9, 2013

Can competition be made more attractive to the left?

Some economists tend to emphasize some market failures more than others, and despair at the failure of ordinary citizens to see the damage that their preferred market failure produces on the economy and society. A clear example is the emphasis on competition. I share a concern for competition: wherever possible and desirable, competition should be promoted. Competitive markets, under some conditions, are conducive to efficiency. However, these economists should not forget:
-The theory of the second best: when there is more than one market failure, addressing only one of them does not guarantee efficiency. For example, if there is a negative externality and market power, addressing only market power may make the externality problem worse by increasing output.
-The presence of a competitive market by itself does not do anything by itself in terms of equity, although competition may promote a more meritocratic society, which may be good if there is equality in the initial conditions.
-More competitive markets create losers. Potential losers will not accept more competitive markets unless there are mechanisms to compensate for the losses. Even if these mechanisms were present, potential losers may find that promises to compensate them are not credible, unless the adequate institutions are in place. Sustainable competitive markets require sustainable welfare states.
-Some competition takes place in markets where there are positional externalities, that is, consumers compete with others for status, as described by Robert Franks in "The Darwin Economy". This sort of competition is wasteful and has large welfare costs.
I agree that competition and competition policies are important ingredients of a modern economy, but competition should not be seen in isolation from the overall economy. Ordinary citizens are perhaps not that ignorant of the overall impact of competition.

No comments:

Post a Comment