Market failure in the provision of facilities for people with disabilities

Question

In the US, I believe it is a statutory requirement that all places are accessible for people with disabilities. However, if it were not for this statutory requirement, I would imagine that accessible facilities would be less common. Profit-maximising businesses may not undertake this kind of investment if they only imagine it benefitting a very small number of customers. Hence, the government regulates this to ensure equity. But how can we frame this issue in terms of welfare economics and market failure? Is inequity a kind of market failure? Could it be that these facilities are a public good? Is it a case of there being a positive externality? Or does economics lack the tools to explain this behaviour? Thank you!

Answer 1

There are ways of framing this from public economics perspective, but let me first address your question before providing what I believe is most correct answer:

Is inequity a kind of market failure?

No, inequity itself is not market failure. Market failure, by definition, is a situation where market does not provide efficient allocation of resources (e.g. see Baar Economics of Welfare State 5th ed chapter 3), and efficient allocation has nothing to do with equitable allocation.

Could it be that these facilities are a public good?

Public good has to have two following characteristics (ibid pp 51):

• be non-excludable (it is not easy or too costly to exclude people from using it)
• be non-rivalrous (at a current level of demand there is excess capacity e.g. theatre that is half-full)

in addition to above two, recently some authors prefer to also add third condition (ibid pp 51):

• non-rejectability (if the good was supplied it cannot be rejected e.g. national defense). But this condition is not included by every source.

These facilities fail most or all of these criteria.

First, this facilities are clearly excludable. Second, if the facilities do not have large unused they are also rivalous. Third non-rejectability would depend on what facility we talk about. So this is not good way of framing the issue from public econ perspective, since the first condition is clearly not satisfied pretty much for all facilities I can think of and other two are debatable (note even if one condition is not satisfied the good is not public good but some other category).

Is it a case of there being a positive externality?

This could be possible in some cases. This depends whether allowing disabled people access to those business has some positive wider effect on third parties (i.e. other people than disabled people and business themselves).

This is ultimately empirical question, you can make arguments either way. For example, having educated people including disabled people is likely to have positive effects on society beyond just increased wages of people themselves (e.g. it is possible educated people are nicer, more informed voters etc). So you could make good argument that such facilities should be provided at schools/universities. You would need to look at other places on case by case basis.

So this could be one possible way how to frame it from public economics perspective.

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However, while you can frame this issue in terms positive externalities (subject to some empirical inquiry if they are present), the most correct term to frame it is not from perspective of market failure but from distributional normative perspective.

Making economy as efficient as possible is not necessarily appropriate social objective. In public economics when we decide on optimal policy we do not simply look at what is most efficient outcome. Rather we first create some social welfare function e.g. 'vanilla' Marshallian welfare where you look total surplus (consumer+producer), utilitarian social function where people's preferences are assigned weight depending on their (decreasing) marginal utility (assuming cardinal utilities as this does not work with ordinal utility), Rawlsian welfare function where state only assigns positive welfare weight to poorest people in society and everyone else gets zero welfare weight, classical-liberal welfare function where everyone's preference gets equal weight etc). Once we have some social welfare function, we maximize that even if it would come at cost of making economy as efficient as possible (this is why welfare/public economics is separate field from lets say micro or macroeconomics).

Here the most correct framing is not from efficiency perspective but from normative perspective. People with disabilities are typically poorer as due to their disability they are less able to provide for themselves. For example, using utilitarian or Rawlsian social welfare function society should redistribute resources to these people from others, even if this comes at a cost of distorting efficient allocation of resources.

Now, usually the most efficient way how to redistribute resources are direct transfers, but this is not always the case. It might be quite difficult for these disabled people to organize and pay for these facilities from the redistributed funds. In this case it can be reasoned the most effective way to redistribute resources is simply to make firms mandate to provide facilities for them. This will have to come out of combination of lower profits, wages or higher prices so its effectively a redistribution measure.

In terms of welfare/public economics this is in my opinion the most reasonable framing. The positive externality argument also makes sense in some cases, but as a result that argument has to be examined on case by case basis.