The nirvana fallacy

The nirvana fallacy
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First Published: Fri, Oct 12 2007. 12 31 AM IST
Updated: Fri, Oct 12 2007. 12 31 AM IST
In his article “If the show doesn’t fit, blame the tyranny of the market” in the Web magazine, Slate (www.slate.com), Wharton School professor Joel Waldfogel criticizes the market: “For small groups with preferences outside the norm, the market often fails to deliver.” The argument is simple: some goods have large set-up costs or fixed costs of production, which means you need a large group of customers to justify incurring them.
Waldfogel doesn’t seem to demonstrate any kind of market failure as economists understand the term. For it to make sense to produce any product, people must value it enough to cover the fixed costs. Else, …the costs of making it would exceed the benefits. That products desired by too few people aren’t produced is a success of markets, not a failure.
A system that forced us to satisfy all preferences, however rare, would be impossibly expensive. There are increasing costs and diminishing gains to satisfying ever more idiosyncratic preferences, so the line must be drawn somewhere. Seems to me that weighing fixed costs against the strength of preferences, in the form of willingness to pay, is the logical principle—and that is the market principle.
As Adam Smith observed, specialization is limited by the extent of the market. The more well developed markets become, and the more people and societies which participate in them, the greater are the opportunities for satisfying idiosyncratic tastes. Entrepreneurs have an incentive to exploit each niche as soon as there are enough potential customers. A preference shared by only 0.01% of the population might initially go unsatisfied in a small market order, but as the population expands, it becomes ever more likely the preference will be satisfied. Isn’t this an argument for expanding the market order?
Waldfogel is committing the Nirvana fallacy—that is, condemning the market because it falls short of perfection. In this case, Nirvana is apparently a state in which all preferences are perfectly satisfied. That option is not on the table. So what institutional arrangement would do a better job? Would Waldfogel advocate having the government force firms to provide more options, despite the inefficiency of doing so? Interestingly, he blasts some market outcomes for how similar they are to the results of the political process! So the argument is that sometimes markets are almost as bad as government? Is this a serious criticism, really?
Edited excerpts from http://agoraphilia.blogspot.com/2007/10/waldfogels-wiffle-bat.html. Comment at otherviews.com
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First Published: Fri, Oct 12 2007. 12 31 AM IST