Can We Solve Market Imperfections by Changing Societal Norms?

In economic policy discussions, there is a lot of talk about the government intervening in the market to solve for market imperfections or failures, whether it be too many negative externalities, too little positive externalities, disequilibrium due to wage and/or price stickiness, etc.  These are usually assumed to be constants that only the government can really take corrective action to address.  However, I think that many of these market imperfections stem from prevailing societal norms and modes of thinking, an underlying structure that frames how the market actually operates.

For example, take the example of pollution.  The market tends to overproduce pollution, as the private costs of pollution do not usually match the societal costs of pollution.  Or, at least, it might not seem to private actors that private costs match societal costs.  In reality, though, perceived private costs are likely much lower than actual private costs, as many of the effects of pollution are indirect.  For example, a company might release air pollution that damages the health of either its employees or its customers.  This lowers productivity, reducing potential income both for the company and society (who could use that money to buy company products).  Even though these indirect costs might be substantial, it is the norm for businesses not to think beyond direct costs and thus to undervalue both the private costs and societal costs of their actions, causing them to overproduce pollution.  This is further reinforced by the widespread belief that environmental protection tends to hurt business, causing a market underproduction of environmental protection relative to optimal private & societal production.  If we could change these norms and modes of thinking, we could potentially help solve the negative externality of environmental pollution.

Another example of how norms can cause market imperfections (and how changing them could thus solve such market imperfections) is in the case of wage and price stickiness.  As I’ve mentioned on this blog before, there exists certain modes of operation when businesses set prices and wages.  Prices for many products, for example, are usually only adjusted a few times a year (out of habit, law, and/or fear of disgruntled consumers), and in certain industries it is the norm to adjust the number of employees before modulating wages (or vice-versa).  Wages, too, do not usually change rapidly, out of habit, law, and/or out of fear of disgruntled employees.  For both prices and wages, laws restricting their flexibility stems from societal norms, and consumer/employee disgruntlement that would result from such flexibility would stem from established consumer/employee expectations of stability.  Unfortunately, this wage/price stickiness tends to cause disequilibrium (a deviation in actual output from potential output) and (at least temporarily) can exaggerate (rather than mitigate) expansions and contractions in the business cycle.   Perhaps, if we changed these modes of operation and societal thinking, we can make wages and prices more flexible, helping the market to naturally smooth out the business cycle itself rather than relying on governmental counterbalancing.

The great thing about adjusting societal norms is that it could theoretically lessen (though not eliminate) the need for government intervention to solve for market imperfections.  The problem, however, is twofold: first, adjusting norms is obviously rather hard.  Additionally, changing norms can itself ironically require governmental intervention so as to affect an actual change.   Regardless, as we seek alternative methods of boosting the economy, it merits consideration.


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