Framework

Market Failures Approach (MFA)

The question it answers

When reviewing how the firm makes its profits, which strategies should a business owner drop because they rely on market failures rather than fair competition?

Origin
Heath, 2014; Heath, 2006
Diagram type
Hub diagram
Level of analysis
Firm
Topics
Ethics & corporate governanceMarketing & salesCorporate finance
Clay balance scale with two level glass pans, icon for business ethics

Diagram

Market Failures Approach (MFA)

Pareto-efficient market
Competition: no barriers to entry, no price rigging
Information: no misleading ads, no hidden risk
Externalities: do not push costs onto third parties
Public goods: do not free-ride on social infrastructure
Contextual judgement: fixing one failure may not improve overall efficiency

When to use it, and when not to

Use it when

List current profit strategies, map each to one of the four conditions, and drop any that exploit a violation.

Pitfalls

Pitfall

Using MFA to justify every compliance cost; forgetting that Heath does not impose direct duties to every stakeholder.

Sources

References

Listed A–Z by author surname, Harvard style. A source with a DOI links to https://doi.org/…; one without links to its page or says plainly that it has no DOI.

  1. Acharya, V.V. et al. (2011) Market failures and regulatory failures: lessons from past and present financial crises. Tokyo: Asian Development Bank Institute (ADBI Working Paper 264).No DOIadb.orgSource page
  2. Heath, J. (2006) ‘Business ethics without stakeholders’, Business Ethics Quarterly, 16(4), pp. 533–557.doi:10.5840/beq200616448Source page
  3. Heath, J. (2014) Morality, competition, and the firm: the market failures approach to business ethics. New York: Oxford University Press.doi:10.1093/acprof:osobl/9780199990481.001.0001Source page
  4. Lipsey, R.G. and Lancaster, K. (1956) ‘The general theory of second best’, The Review of Economic Studies, 24(1), pp. 11–32.doi:10.2307/2296233Source page
  5. Tarr, D.G. (2010) ‘The political, regulatory, and market failures that caused the US financial crisis: what are the lessons?’, Journal of Financial Economic Policy, 2(2), pp. 163–186.doi:10.1108/17576381011070210Source page