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As Mankiw explains in chapter 10 of the latest edition of Economics (chapter 9 in the previous few, I believe).

Positional externalities lead to "a professional squash player getting the extra edge..." and forcing other players to take the same measures. To paraphrase slightly. Mankiw then goes on to draw an analogy with business and education leading unis investing time in extra revision classes and sending teachers on courses. Furthermore he describes the case of applicants gaining mster's degrees for jobs which doesn't benefit the company but costs the applicants much time and effort ("the arms race").

This leads me to two conclusions. Firstly given that most companies are constantly in arms races to differentiate themselves from their competitors often through marketing, marketing is therefore is a market failure.

Secondly, while making the case for positive externalities of education and therefore justifying subsidies, Mankiw states that the nature of applicants striving for ever more education is a market failure. I suppose implying that often further education is also market failure.

Perhaps this is too discussion based for this forum. I have had several threads deleted for similar reasons. But perhaps this will get under the radar.

Anyway. I'd be interested to hear your thoughts.

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    $\begingroup$ "Perhaps this is too discussion based for this forum." The body of your post holds no question, and it seems only very weakly related to title, so yeah! $\endgroup$
    – Giskard
    Mar 16, 2023 at 8:06
  • $\begingroup$ "Firstly given that most companies are constantly in arms races to differentiate themselves from their competitors often through marketing, marketing is therefore is a market failure." Though one can create contrived models that say otherwise, I think most economists would agree that non-informative commercials are a market failure. (Marketing is a much broader term; market analysis can give a company useful information about the needs of their potential customers.) $\endgroup$
    – Giskard
    Mar 16, 2023 at 8:08
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    $\begingroup$ "Secondly, while making the case for positive externalities of education and therefore justifying subsidies, the nature of our jobs market means that often further education is also market failure." If you subscribe to the Spence model of job market signalling, then the equilibrium outcome is indeed not Pareto-efficient. There is empirical research on whether the Spence model is to be believed. (But I have no reference.) $\endgroup$
    – Giskard
    Mar 16, 2023 at 8:09
  • $\begingroup$ I think the word "often" is critical in your second statement; most people would argue that the argument does not cover all industries and all of education. E.g.; a trained doctor or engineer is probably preferable to an untrained one, a literate bus driver preferable to an illiterate one, etc. $\endgroup$
    – Giskard
    Mar 16, 2023 at 8:45
  • $\begingroup$ Thanks Giskard. I think you're right. My question was a little stream of conciousness. My ideas morphed as I was writing it. As I was reading the book my first thought was using Mankiw's definition, pretty much all markets are an arms race to innovate and eventually zero sum. Therefore "the market" is a positional externality! I will look up the Spence model. And finally regarding education. Agreed, I think it comes with caveats. But there are jobs which are becoming increasingly "academified" which don't actually require the ability to write a dissertation. Anyway thanks for your input. $\endgroup$
    – Studi
    Mar 17, 2023 at 11:22

3 Answers 3

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Marketing is not a market failure but rather a firm’s response to the market failure of imperfect information. Information frictions can be seen as a form of market failure. Arguably, if all information were perfect, there would be no need or use for marketing.

I am not sure I understand your point about education, but it’s possible that a similar logic applies.

P.s. I would recommend to rephrase your post as a question and not as a discussion. In this case, I think the question element could be understood as implied, but please consider it for the future.

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  • $\begingroup$ Yes, I am aware of the imperfect information and signalling point of view of marketing. However, I would also postulate that it is common for marketing to be misleading to some extent. I think immediately of empty roads and the implied environmental benefits of various car ads. $\endgroup$
    – Studi
    Mar 18, 2023 at 9:11
  • $\begingroup$ I have attempted to adjust the question (without changing the content too much). $\endgroup$
    – Studi
    Mar 18, 2023 at 9:12
  • $\begingroup$ If information were perfect then marketing could not be misleading, because everyone would perfectly know the truth that roads are not empty and about the real environmental impact. $\endgroup$
    – BB King
    Mar 18, 2023 at 17:41
  • $\begingroup$ Perfect info means lies are not possible to be believed at all. For marketing to have any effect, you would need at least 1% doubt about the roads. Perfect info js not just a general belief that roads probably aren’t that free, but 100% certainty about roads so no one ca mn convince you otherwise, because you 100% for sure already know all truth. $\endgroup$
    – BB King
    Mar 18, 2023 at 17:48
  • $\begingroup$ Imperfect information is not a market failure, it is simply a fact of life. Market failure are systemic issues that cause a market to fail to reach a practically achievable optimum. Information frictions are costs just as real as production inputs, and treating them as a market failure is TBH completely absurd. $\endgroup$ Aug 31, 2023 at 4:13
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Positional externalities are not actual externalities. Just like opening up a bakery near another bakery doesn't cause externalities even tho it does likely reduce the first bakery's customer base. The usual consideration is that if the possible "externality" harms someone through the price system, it is not actually an externality. Positional externalities are exactly these things - people competing with each other. Its fair game and does not cause system economic inefficiencies (ie market failure).

What might be going on with things labeled "positional externalities" is rent seeking. This can happen in a monopolistic market where there is a substantial producer surplus. That surplus can be a pot of gold that competitors are willing to burn most of in order to obtain it. The market failure here is the monopolistic product - the rent seeking behavior is a potential consequence of that.

The 3 types of market failures are:

  1. Externalities
  2. Anti-competitive markets
  3. Suboptimal initial resource allocation

The "arms race" of education is caused not by a market failure, but by a cultural failure. We were all told that everyone should go to college so they can get a good job. Well, after everyone proceeded to do that, suddenly we had far more college graduates than we need. The result is that many job categories simply raise their standards to require more education. This provides a perverse signal that more education is needed.

The real problem is that the majority of people out there are still indoctrinated with an outdated philosophy around education, and this indoctrination is leading them to do suboptimal things. However, all the incentives are in place for people to change their behavior. It will simply take time, and lots of it, because it happens not on the scale of days or weeks, but generations. Parents pass their philosophy about this down to their kids, and their children are locked into a plan before most of them really get a chance to understand and evaluate the plan. So it takes a generation or two to actually internalize and progress in things like this. Its not a market failure, its simply human.

Another angle to think about this from is: how would you improve the situation? Would you use government power to ration educational slots? Would you tax education as a disincentive? Would you run a public information service campaign to advise people against sending their kids to college and advise companies to relax their requirements? All of these measures are likely to do more harm than good, because the current situation is caused by honest belief and not by misaligned incentives. Tho I would say removing subsidies for higher education would be a very positive move.

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As Mankiw explains in chapter 10 of the latest edition of Economics (chapter 9 in the previous few, I believe).

Positional externalities lead to "a professional squash player getting the extra edge..." and forcing other players to take the same measures. To paraphrase slightly. Mankiw then goes on to draw an analogy with business and education leading unis investing time in extra revision classes and sending teachers on courses. Furthermore he describes the case of applicants gaining mster's degrees for jobs which doesn't benefit the company but costs the applicants much time and effort ("the arms race").

This leads me to two conclusions. Firstly given that most companies are constantly in arms races to differentiate themselves from their competitors often through marketing, marketing is therefore is a market failure.

Secondly, while making the case for positive externalities of education and therefore justifying subsidies, Mankiw states that the nature of applicants striving for ever more education is a market failure. I suppose implying that often further education is also market failure.

Perhaps this is too discussion based for this forum. I have had several threads deleted for similar reasons. But perhaps this will get under the radar.

Anyway. I'd be interested to hear your thoughts.

Studying in higher education indeed presents various challenges, especially when delving into complex topics like market failures. The intricacies of positional externalities can be quite overwhelming. In my academic journey, I've encountered difficulties in grasping these economic concepts and effectively articulating my ideas in assignments. To tackle these challenges, I turned to StoryboardThat's Informational Text Structure Worksheets. These worksheets have been a game-changer for me in breaking down complex theories and structuring my academic writing. They offer a clear roadmap for organizing ideas and improving the quality of my work. If you're navigating the intricate landscape of higher education, I highly recommend checking out these worksheets at StoryboardThat. They've become an invaluable resource in my quest for better grades. So, if you're facing difficulties in understanding market failures or any other academic topic, these worksheets can provide the guidance you need.

You've brought up an interesting perspective on the concept of positional externalities and how it relates to various aspects of the economy.

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