Market Failure
What is a market failure?
When a market exchange produces less value for society than what could have been achieved if the market worked properly
Define “tragedy of the commons.”
When shared, renewable resources are overused because individuals act in self-interest, depleting them for everyone
Why do governments regulate markets?
To correct inefficiencies, protect consumers, and ensure fairness.
What tension exists between corporations and society?
Corporations pursue profit; society seeks fairness and equity.
What is the equity–efficiency tradeoff?
The balance between maximizing total value (efficiency) and ensuring fairness (equity).
Name the four main types of market failures.
Externalities, Information Asymmetry, Public Goods, Insufficient Competition (Monopolies)
What type of good causes this problem?
Common goods — rivalrous but non-excludable.
What is regulatory capture?
When government rules are shaped to benefit large or established firms instead of the public.
What is a social license?
Community acceptance or approval of a company’s presence or project.
What is the prisoner’s dilemma in environmental policy?
Each firm or country has incentive to pollute (defect) even though cooperation would yield better outcomes.
Give an example of a negative and positive externality.
Negative: pollution
Positive: education or R&D knowledge spillover
Describe one real-world example.
Overfishing in the Great Lakes or global fisheries.
What is government failure?
When intervention worsens outcomes due to political bias, regulatory capture, or imperfect information.
What lesson did Keystone XL teach about stakeholder management?
Legal approval is not enough; political and social legitimacy are equally critical.
How can community-based governance escape the tragedy of the commons?
Through clear rules, boundaries, trust, conflict resolution, and adaptive flexibility.
Why can monopolies be considered market failures?
They restrict output, raise prices, and reduce overall welfare by limiting competition.
What are two government solutions to prevent overuse of common goods
Quotas (tradeable permits), taxes (carbon tax), or assigning property rights.
What is a private solution to a market failure?
Self-regulation, tech innovation, or ESG investing (e.g., garment factory safety standards).
How does ESG investment create alignment between profit and sustainability?
Directs capital toward companies that manage environmental and social risks responsibly.
What are examples of cross-sector collaborations?
Vaccine Alliance, public–private partnerships, NGO–corporate cooperation.
How does information asymmetry cause market inefficiency?
One party’s hidden knowledge leads to fewer or worse transactions (e.g., used car market “lemons” problem
What three factors made fisheries successful in the Nature 2011 study?
Strong local leadership, social trust (social capital), and economic incentives like catch shares
Define polycentric governance (Ostrom).
Multiple overlapping levels of management that share authority (local, regional, global) for complex resources.
In the Teck Resources example, how was sustainability integrated into business strategy?
It was embedded in risk management, tied to executive compensation, and viewed as a growth opportunity.
Why are market failures both economic and social?
Because they can cause inefficient allocation of resources and morally undesirable outcomes (inequality, exploitation, harm).