David Friedman describes market failures as situation where individual rationality does not lead to group rationality. What is best for individuals can create adverse effects for the group.
The prisoners dilemma is an archetype of this situation. Other so-called market failures include public goods and externalities.
Friedman illustrates this with many examples. But he also shows that the problem can often be designed around with creative market-based solutions. For instance ad-funded broadcast radio.
He goes on to apply the same analysis to political situations, with problems such as rational voter ignorance, high information costs and political long-termism.
He concludes that where markets are imperfect, markets still offer the best chance of solving the problem, whereas government intervention is less likely to do so.
David Friedman on market failures
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