INDIRECT INTERDEPENDENCIES AS A FUNDAMENTAL SOURCE OF MARKET FAILURE
| Author | Michael S. Common |
| Date | 01 May 1991 |
| DOI | http://doi.org/10.1111/j.1467-9485.1991.tb00306.x |
| Published date | 01 May 1991 |
Srorroh
Joirrnai
of
Pui~lrc~al
&conom.v.
Vol.
38.
No.
2.
May
1991
i
1991
Scorush
Economic
Socieiy
INDIRECT INTERDEPENDENCIES AS A
FUNDAMENTAL SOURCE
OF
MARKET FAILURE
MICHAEL
S.
COMMON’
Centre
for
Resource and Environmental Studies, Australian National University
I
INTRODUCTION
Interdependencies between economic agents have long been recognized as
a
potential source
of
market failure. Discussion
of
the issues arising generally
appears in the literature under the ‘externality’ rubric. One widely recognized
factor making potential into actual market failure is, loosely, publicness in
interdependency. This paper introduces the concept
of
indirectness in inter-
dependency, arguing that indirectness encompasses publicness, and is a more
useful taxonomic device.
It
is suggested that indirect interdependencies are
likely
to
be rather pervasive. Section
I1
of
the paper provides some background
to
the argument, which is developed in Section
111.
Some concluding comments
are offered
in
Section
1V.
I1
SOME
BACKGROUND
The literature
on
interdependency and externality is now extensive, and
no
attempt will be made here to provide
a
comprehensive review. Rather, the
purpose
of
this section is to provide some motivation for the analysis
of
the
next, and
to
set
it
in context. One
of
the few things universally agreed upon
in the externalities literature is that they involve interdependencies between
economic agents. There is then some difference
of
usage as to whether
or
not
the term ‘externality’ should be reserved for those situations where market
failure arises.
Arrow
(1971),
for example, uses the term simply to refer
to
inter-
dependency. He states
(Arrow,
1971,
p.
16),
with reference to
a
model
of
inter-
dependency, that ‘by a suitable and indeed not unnatural reinterpretation
of
the commodity space, externalities can be regarded as ordinary commodities’,
arguing that
it
is not ‘the mere fact that one man’s consumption enters into
*
In
the preparation
of
this paper
I
have receibed valuable cornmenis from Brian Beavis,
Allstair Munro, and the anonymous referee. The usual caveats apply.
Date
of
receipt
of
final
manuscript: 17th
April
1990
132
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