Google Answers Logo
View Question
Q: Word for failure of free market ( Answered,   5 Comments )
Subject: Word for failure of free market
Category: Business and Money > Economics
Asked by: maxcb-ga
List Price: $5.00
Posted: 27 Apr 2003 16:09 PDT
Expires: 27 May 2003 16:09 PDT
Question ID: 196268
"The fundamental idea of modern capitalism is not the right of the
individual to possess and enjoy what he has earned, but the thesis
that the exercise of this right redounds to the general good." --
Ralph Barton Perry.

If I understand it right, when the free market works properly, it's
because the self-interest of individuals (e.g. to make a profit)
coincides with the general interest of the group (e.g. for products
and services). I would like to know if there is a word (an economic
term?) for when this situation does not apply: when, for example, it
is in a corporation's best interest to act contrary to the general good.

One instance of this situation might be a monopoly, when the company
has an incentive to restrict supply and inflate prices. Another might
be when a company has an "external detrimentality," e.g. a factory
that can dump its waste in a river and get away with it. The word I'm
after, if it exists, would encompass all such situations.

Possibly the word might describe all situations (economic or not) when
the interests of an individual are contrary to the group.
Subject: Re: Word for failure of free market
Answered By: dogbite-ga on 27 Apr 2003 17:14 PDT
Hello maxcb-ga,

  In my studies of economics I have never heard
  of *one* word that describes the failure you
  describe.  It does resonate strongly with an
  idiom though -- "Tragedy of the Commons."  I
  have also seen that phrase used regularly in
  several areas of Computer Science literature.

  Those four words are always used together,
  acting as a single word.

  A page with links to many discussions of the
  Tragedy of the Commons is here:

  It is also discussed directly here:

  On that page, it says:

The tragedy of the commons develops in this way. Picture a pasture
open to all. It is to be expected that each herdsman will try to keep
as many cattle as possible on the commons. Such an arrangement may
work reasonably satisfactorily for centuries because tribal wars,
poaching, and disease keep the numbers of both man and beast well
below the carrying capacity of the land. Finally, however, comes the
day of reckoning, that is, the day when the long-desired goal of
social stability becomes a reality. At this point, the inherent logic
of the commons remorselessly generates tragedy.

As a rational being, each herdsman seeks to maximize his gain.
Explicitly or implicitly, more or less consciously, he asks, "What is
the utility to me of adding one more animal to my herd?" This utility
has one negative and one positive component.

1. The positive component is a function of the increment of one
animal. Since the herdsman receives all the proceeds from the sale of
the additional animal, the positive utility is nearly + 1.

2. The negative component is a function of the additional overgrazing
created by one more animal. Since, however, the effects of overgrazing
are shared by all the herdsmen, the negative utility for any
particular decision­making herdsman is only a fraction of - 1.

Adding together the component partial utilities, the rational herdsman
concludes that the only sensible course for him to pursue is to add
another animal to his herd. And another.... But this is the conclusion
reached by each and every rational herdsman sharing a commons. Therein
is the tragedy. Each man is locked into a system that compels him to
increase his herd without limit -- in a world that is limited. Ruin is
the destination toward which all men rush, each pursuing his own best
interest in a society that believes in the freedom of the commons.
Freedom in a commons brings ruin to all.

    I hope that helps you.

Subject: Re: Word for failure of free market
From: geordieandy-ga on 27 Apr 2003 16:15 PDT
Not socially optimal? (Three words...)
Subject: Re: Word for failure of free market
From: pafalafa-ga on 27 Apr 2003 17:41 PDT
One term that is often used in economics, with a meaning close to that
of the question, is simply the term "market failure", which can be
applied to economic, societal, and distriubtional problems.
Subject: Re: Word for failure of free market
From: spurious-ga on 27 Apr 2003 20:14 PDT
"Egocentric" is defined as concerning the individual over others.
Subject: Re: Word for failure of free market
From: geordieandy-ga on 30 Apr 2003 12:38 PDT
to be honest "tragedy of the commons" only really applies to
situations where an agent ignores the social cost of an action, e.g.
by adding more cattle but not considering the falling marginal
productivity of all the other cattle on the land. It does not
encompass areas such as equilibria in game theory that are not
Pareto-optimal, or monopoly where there is a deadweight welfare loss.
Subject: Re: Word for failure of free market
From: mathtalk-ga on 02 May 2003 16:36 PDT
Failure of the "free market" is usually described as market

In some cases this is due to inadequate distribution facilities
(either for products or capital, whose shortages have predictable
consequences), but modern theory has begun to focus on issues related
to imperfect information.  Classic economic theory assumes willing
buyers and sellers acting rationally upon "perfect" information.

Of course in practical terms the quality of information has always
been of substantial importance, but the ability of theory to account
for bad information or "irrational exuberance" in the marketplace is
still limited.  Game theory and its appreciation for uncertain
outcomes (viz. John Nash in A Beautiful Mind) has made some progress
possible in assigning a marketplace value for information.  These
ideas find a practical application in options pricing and arbitrage
(taking advantage of market inefficiencies).

regards, mathtalk-ga

Important Disclaimer: Answers and comments provided on Google Answers are general information, and are not intended to substitute for informed professional medical, psychiatric, psychological, tax, legal, investment, accounting, or other professional advice. Google does not endorse, and expressly disclaims liability for any product, manufacturer, distributor, service or service provider mentioned or any opinion expressed in answers or comments. Please read carefully the Google Answers Terms of Service.

If you feel that you have found inappropriate content, please let us know by emailing us at with the question ID listed above. Thank you.
Search Google Answers for
Google Answers  

Google Home - Answers FAQ - Terms of Service - Privacy Policy