The Father Of "Market Failure" Analysis Dies

That would be Francis M. Bator. Born in 1925 in Budapest (moving to US in 1939 with family), Francis M. Bator died at age 92 a few days ago after being hit by a human-driven car while crossing the street. The funny thing is that when I read of it, I  was surprised he was still alive, thinking he had died some time ago.

It turns out that for the public he is best known as an economic and national security adviser to LBJ in the 1960s, being for awhile the Deputy National Security Adviser to McGeorge Bundy and thus partly responsible for the war in Vietnam policies.  I did not know about that and am uninterested in commenting on that, although supposedly he left the administration in 1967 mostly because of his lack of enthusiasm for that war, after encouraging friendlier relations with both the USSR and western Europe.  He also seems to have been one of the founders of what is now the Kennedy School of Government at Harvard,  where he went after being in the LBJ administration, retiring in 1994.  In later years he wrote much about interaction between fiscal and monetary policy, but little of it is of much longer term interest.

Why Bator interests me and why I am posting this is because of his intellectual role dating from 1957 and 1958, soon after here got his PhD from MIT under Robert Solow, with a pair of highly influential articles that essentially set textbook discussions of the matters they discussed (and as I basically had not heard of him since the 1960s is why I thought he was dead, not being aware of how young he was when he wrote those papers).  The second one is the more important and gave the label to his now widely accepted formulation, "The Anatomy of Market Failure." It was Bator who coined that term and who also laid down the standard list of reasons for  "market failure," the syndrome of a free market possibly failing to be Pareto optimal, essentially a large caveat on Pareto's First Welfare Theorem that says that general equilibrium is Pareto optimal.  The textbook four reasons for such possible market failure according to  Bator are monopoly power, collective consumption (or "public") goods, externalities, and imperfect information.

Probably the most important part of his formulating this widely accepted list is that he was the first to clearly distinguish between the second two of these: collective consumption (public) goods and externalities.  It is easy to forget that both of these involve collective aspects in one way or another, but in slightly different ways.  But in our accepting his distinction we have come to forget that some of our most important problems involve both simultaneously being involved, with global climate change being perhaps the most important current example.  Pollution leading to climate change involves externalities while the condition of the global climate is clearly a collective consumption good of the highest order.

As it was, externalities were first rigorously analyzed by Pigou in 1922 in his Economics of Welfare, with the "Pigovian" view becoming the standard textbook view, and still is with some caveats.  Thus the 1960 critique by Ronald Coase in his "Theory of Social Cost" made it clear that under the right conditions, well-defined property rights and low transactions costs, markets might succeed in internalizing externalities, and much environmental policy since, including cap and trade, have been inspired by trying to bring about an internalization of externalities using markets.  It must be noted that Bator's paper appeared two years prior to Coase's.

The part that had not been clarified until shortly before Bator's papers involved collective consumption goods, with this being done in 1954 in a famous paper by Paul Samuelson, who would have been teaching Bator when he was a grad student at MIT.  Samuelson's famous formulation is that such good involve non-depletion and non-excludability due to  their collective nature, which implies that to find true market demand one must vertically sum individual demand curves in the form of "willingnesses to pay" in contrast to the horizontal summation of demand curves we see in markets for purely private goods.  Super individualists sometimes argue that there are no pure collective consumption goods, and it is true that some classic examples such as lighthouses have been shown not to be such, but some certainly do exist, with global climate a pretty clear case.

In any case, presumably influenced by the recent publication of Samuelson's clarifying paper on collective consumption goods (where Samuelson did not comment on the matter of externalities), Bator proceeded to produce his list and analysis, which indeed went into the textbooks a long time ago, much  to the annoyance of some free market Coasian types, such as the late James Buchanan, who regularly publicly debated Richard Musgrave, who played a key role in putting Bator's analysis into the public finance and public economics textbooks.  I am unaware of anybody ever suggesting that Bator should get a Nobel Prize for what he did, but serious rumor has it that when Buchanan got his for public choice, the person who  nearly shared it with him and did not was not Gordon Tullock but Buchanan's long-running debating partner, Musgrave, who is probably more widely identified with advocating the "market failure" analysis than is Bator.  But it was Bator who first formulated it.

Barkley Rosser