Economics of Failure
• Failure arises because of: Basic human condition of scarcity (scarcity of means in
relation to what we desire. What we want we can’t get cause of the scarcity),
human search for greater rewards and because of the market system (the more
things that are moving quickly, the more likely people or firms are to fail.)
• Some people and producers may not be able to get/keep and retain the resources
they want/have. Some choices may not work out.
• Pervasiveness of scarcity ensures failure.
• A release of resources that can be reemployed, and a decrease of abundant goods
& services produced that can be sold at higher prices.
• As some things fail, others will start and grow
Searching for greater rewards
• Even efficient firms should fold if more efficient firms exist.
• If you aim far and high, the likelihood of you failing is much higher that aiming
for something small.
• No such thing as ABSOLUTE performance
• Relative performance matters
• A beautiful female can fail to attract a male if an even more beautiful female is
• Information is costly both in the product and resource market
• People try and avoid failure by trying to go to fortune tellers but they don’t know
about the future, NO ONE does
• Firms can’t always tell what products will sell. They have to find different lines so
if one fails the move to another.
• Information problems may not always be correctible because of scarcity.
• Public policy may try to “redistribute” successes and failures through the tax
system (or subsidies). EG. Sharing the wealth. > Employment insurance
• Centralizing decision making process will not solve the information problem.
Centralized economies fail because it is impossible
• Central planning imposes superhuman demand on limited capacity of planners to
handle information (it is very difficult to get information) Risk, Uncertainty and Rational Failures
• Information deficiencies equals problems of risk and uncertainty about future
• Risk: Probability distribution example: 7 out of 10 restaurants will fail (this is
the risk profile or starting a new restaurant)
• You can compute risk whereas….
• Uncertainty: Lack of information makes it impossible to estimate probability of
success no risk profile, you cannot compute it
• One can always get a little more information, at a cost, but sometimes it can’t be
had at all.
• Risk and uncertainty will INSURE some firms, plants, and workers will fail.
• Plants that close simply find cost of continuing outweighs the benefits.
• Preventing failures may be very costly in that they cost of keeping the firms going
would be high
• The resources in the “failing” firm could be used i