The institutional dimension of market failure

Abstract

Motivation: At the turn of the 19th and 20th centuries, institutionalism was presented by T. Veblen as an alternative to neoclassical economics. On the basis of neoclassical economics, in addition to the explanation how an effectively functioning market leads to maximization of welfare, we also find a market failure analysis. The main theme of the presented study is an attempt to synthesize these concepts, in particular to show how the institutional approach modifies the perception of the market failure.Aim: The aim of the article is to analyze the market failure on the basis of institutional economics. In addition, an attempt was made to determine how institutional solutions can result in limiting certain types of market failure.Results: In the light of the analysis carried out, the analysis of market failure based on Veblen’s institutionalism is not justified. However, the relation between the New Institutional Economics and the neoclassical interpretation of market failure can be noticed, mainly, when it comes to explaining the reasons for the existence of markets and the methods used to counteract external effects.

Keywords

• market failure
• institutional economics
• neoclassical economics