# What is a market failure? [Investopedia defines a market failure](https://www.investopedia.com/terms/m/marketfailure.asp) as `Market failure is the economic situation defined by an inefficient distribution of goods and services in the free market. In market failure, the individual incentives for rational behavior do not lead to rational outcomes for the group.` This is about as clear as dirt, so I’m going to waste some time on figuring out what this means. [[Mark McGranaghan]] points out that traditional market failure is how far from optimal/efficient you are. Also that [[Market failures are coupled to externalities]]. Tentatively, here are the questions I would ask (assuming a thing that magically we know will be amazing for humanity in the long run.) 1. At what point would someone pay for the thing? 1. Is the thing in a form that people will pay for? ie. people won’t pay directly for a search engine 2. Can you create a business model around a thing that people won’t pay for? ie. Advertisements on a search engine to monetize the eyeballs 2. Is the time-discounted amount that people would pay for the thing greater than the amount it would cost to get the thing to a point where people would pay for the thing? 3. Are the people who need to build the thing able to capture the money that people would pay for it? 4. Can you ‘buy’ the money to get the whole thing to #1? 1. This could be because of the timescales involved in a funding mechanism - [[Venture capitalists need to fund things that increase valuation in a few years and return in 5-7 years]], public markets want to see quarterly growth 5. 5. Does anybody believe #1 -> #4 enough to do the work? By definition, if an activity happens at the ‘optimal’ level then there is no market failure. And The line between ‘markets working’ and ‘markets not working’ Is someone tinkering in their garage using their own money and eventually building something people want an example of markets working or not working? It’s uncomfortable but maybe we have to look at the person’s motivation - if the person was building the thing with the (rational?) expectation that they would be compensated (monetarily, or emotionally) by the market then it’s not a market failure, but if they’re doing it despite the rational expectation that they won’t be compensated, than it is. People’s expectations seems like an admissible thing. First, what is a situation where markets *do* work? I would generalize it to a situation where someone is willing to make, do, or acquire something at a price that someone else is willing to pay. For the discussion of research, it doesn’t need to be limited to things that people will straight-up buy - the result of building the thing could be a promotion, glory, or just continued funding. When a market works, things get built either because there is someone saying “I want this thing!” or because the builder has a rational expectation that when the thing is built there will be someone willing to buy it at a price that takes into account the time spent building it. Value capture comes into play as well - if someone wants something but isn’t willing to pay for it, or the time you spend building something would not be compensated even though people *are* willing to pay for it in aggregate, the market does not work. [[Don Boudreaux]] asserts that [[Market failures are actually failures of the existing institutions to allow markets to work]]. This framing is both tautological and useful. ### Related * [[bonvillianARPAEDARPAApplying2011a]] * `DARPA has repeatedly launched related technologies that complement each other, and which help build support for the commercialization or implementation of each. ` * [[Vertical and horizontal market failures close shots]] * [[Knowledge of how markets and innovation work has made us jaded]] * [[Applicable markets have band gaps]] * [[Decoupling from market discipline is like cave diving]] * [[Notes on resources around market failure]]