by Jim Rose in applied welfare economics, entrepreneurship, managerial economics, market efficiency Tags: Luke Froeb, market failure, market success

Luke Froeb found that his MBA students fell asleep when he lectured on market failure and the standard possible public policy responses. His teaching evaluations were so poor that keen threatened firing him if he didn’t improve.

Froeb repackaged market failures as a business opportunity. His students sat up in class and paid close attention. The end result of his efforts is the best single MBA textbook around.

Inefficiency from market failure implies the existence of unconsummated, wealth-creating transactions.

Froeb told his students that the first to fill these gaps in the market or be the market maker for the missing market stands to profit.

Alert entrepreneurs make money by identifying unconsummated wealth-creating transactions and devise ways to profitably consummate them.

Froeb argued that mistakes are made – business opportunities are missed – for one of two reasons:

lack of information or

bad incentives.

To diagnose a problem, ask 3 questions:

Who is making bad decision? Do they have enough info to make a good decision? Do they have the incentive to do so?

The solution is in the answers to these questions:

Let someone else make the decision, someone with better information or incentives. Change the information flow. Change incentives

Froeb argues that the art of business consists of identifying assets in low-valued uses and devising ways to profitably move them to higher-valued ones.