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Performance and ProgressEssays on Capitalism, Business, and Society$
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Subramanian Rangan

Print publication date: 2015

Print ISBN-13: 9780198744283

Published to Oxford Scholarship Online: September 2015

DOI: 10.1093/acprof:oso/9780198744283.001.0001

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Positional Externalities As A Source of Market Failure

Positional Externalities As A Source of Market Failure

(p.325) Chapter 19 Positional Externalities As A Source of Market Failure
Performance and Progress

Robert H. Frank

Oxford University Press

In contrast to many of his modern disciples, Adam Smith never believed that unfettered markets always ensure socially benign outcomes. To him, what was remarkable was that self-interested actions often led to socially benign outcomes. Like Smith, modern progressives tend to attribute the market’s failings to conspiracies by powerful corporate actors. This chapter defends the competing view that those shortcomings are rooted in competition among individuals for relative advantage. Discrepancies between individual and collective interest help explain the presence of overtime laws, workplace safety regulations, and many other institutional features of the modern welfare state. These features would be useful even if all consumers were perfectly informed and markets took the perfectly competitive ideal form described in textbooks.

Keywords:   externalities, market failure, relative performance, consumption tax, Adam Smith

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