How relevant is ‘market failure’ to policy analysis?

The National Centre for Vocational Education Research this week published a series of papers on competition in the vocational training market, including one by me, and another by Australia Institute boss Richard Denniss.

The Denniss paper questions the role of markets in vocational education because of ‘market failure’ – defined as real-world markets not matching the theoretical perfectly competitive market of economics textbooks.

I would not contest the basic observations on which this claim is made. For example, there is ‘imperfect information’ in education markets (eg it is hard to know which education provider is best). There is scope for ‘inter-temporal mismatch’ (eg students may take courses for which there turns out to be no employer demand when they graduate; providers may offer courses only to find that student demand has changed by the time they start).

But describing issues like these as ‘market failures’ is not a good analytical approach. Rather, these are inherent problems in coordinating the delivery of education, with which any coordinating mechanism, market or state, has to contend.

So the policy question is not whether the education market meets theoretical standards rarely observed in the real world, but whether better long-term results are likely to be achieved through education providers and students interacting through free exchange, or through central direction and control.
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