The failure of market failure

The concept of market failure was originally presented by economists as a n ormative explanation of why the need for government expenditures might aris e. Gradually the concept has taken on the form of a full-scale diagnostic t ool frequently employed by policy analysts to determine the exact scope and nature of government intervention. For some time, economists have known th at the market failure idea is conceptually flawed. The authors of this arti cle demonstrate why this is SO, employing concepts drawn from the perspecti ve of transaction costs. In a review of empirical studies, they further sho w how the market failure diagnostic leads analysts to make generalizations that ave not supported by facts. Transaction cost analysis helps to explain the underlying processes involved. (C) 1999 by the Association for Public Policy Analysis and Management.