Market Failure: A Neglected Concept.

Mark Thompson, Director General of the BBC, said in 2007: “The only economic justification for the BBC – indeed for any public intervention in broadcasting – is market failure”. Many of the benefits he itemised in that speech are things that reasonable people should want to be widely accessible.


But the trouble with the argument is that it makes an assumption of market failure and does not give the concept – potentially a useful one – a chance to do its job. It does not acknowledge that state intervention when it is not justified has a negative impact. It inhibits competition, and reduces the incentive for private players to take risks.

Since markets can be very efficient, the concept of Market Failure was invented to identify where public intervention was really justified – and where it was not.

The theory identifies two main causes of failure. Market Imperfections due to lack of competition, and Externalities. Externalities occur where something causes ill effects without having to bear the cost. You could argue, for instance, that if accurate News was expensive and hard to get, fewer people would be well-informed at election times and make ill-informed choices with negative effects for other electors.

Those who think the concept is relevant to broadcasting – and I accept that some people don’t – would argue that the scale of the intervention should equal the scale of the failure? From Ofcom’s figures we can put the scale of intervention at somewhere short of £4bn – made up of the BBC Licence fee plus lesser benefits to other broadcasters in the form of reduced-price spectrum, favoured positions on guides, etc.

What are the consequences if the “solution”, £4bn of public money, exceeds the “problem”? For a start, if there is Market Failure today, and there probably is, we have no idea what and how much – for most of the £4bn of public subsidy goes on genres that the market could perfectly well provide. Most of it is spent on Entertainment.

In fact, no Government department or regulator has been willing to address either the fact or the consequences of excessive intervention in broadcasting. However, I am not alone in thinking the basis of broadcasting regulation and policy that has prevailed for the last few decades should be overhauled. Inevitably, the BBC, the UK’s prime media asset, must be at the heart of that review.

So how would a Government address this if it wished to remedy the problem of excessive intervention? It should start by acknowledging that it doesn’t know the scale of Market Failure and spell out some must-have items, available to all in the public interest, leaving the entertainment industry to get on with the entertaining.

Some items for the wish-list are obvious: accurate news, childrens’ content from the UK, etc. My guess is £300 to £400m would cover the basics. The body set up to administer this would develop the techniques to monitor what other public wishes or were not being met and decide where intervention was justified.

Such a reversal of policy would have massive consequences and need careful thought. In the remaining posts in this series I will argue that change is inevitable anyway – some of the reasons for which I have given in earlier postings – and that getting future solutions right will require smart thinking and energetic debate.

(On reflection, I have taken down an earlier posting on Market Failure. It tried to cover too much ground and the attempt to inject some humour into a complex issue didn’t work.)