An Alternative View to the Cause of Market Failures: A Dynamic Approach

Abstract

This paper presents an alternative view to the cause and size of market failures. The work here suggest that the size of the market failure is not man made per se but rather given a full set of initial conditions it is endogenous to the dynamical forces at play. It is shown that the level and variance of market failures is tied to the location of the steady state ( i.e . level of development). The paper finds that only changes to the location of the steady state produces changes to the potential level of the market failure. This paper adds to the increasing body of literature the notion that institutional change is not a sufficient condition to sustained economic development.