The Tyranny of Small Decisions: Market Failures, Imperfections, and the Limits of Economics*

SUMMARY A market economy makes its large allocations and reallocation of resources on the basis of a summing up of the ‘votes’ recorded by customers in a host of small, individual market transactions. A critical task in appraising the efficiency of such an economy, then, is to determine whether and under what conditions this adding up process produces optimal results. The ‘smallness’ of the decisive, individual transactions—their limited size, scope and time‐perspective—can, it is argued, be a source of misallocations, in the sense that consumers might disapprove of the larger result thereby produced, if they were ever given the opportunity explicitly to vote for or against it. In certain circumstances, the smallness of the relevant decisions may produce authentic market failure. This will be the case where they do not include an independent appraisal of customers’ desire to keep available for possible future use a service that they do not actually use in sufficient amount to cover the costs of providing it. In other circumstances, the smallness of the individual transactions may encourage irrational consumer choice, because they are too small to justify the effort of securing good market information. In yet others, monopoly elements may cause the buyer to be presented with excessively narrow choices that do not correctly reflect that actual costs of the competing alternatives; and the result may be an uneconomic spiral of product quality changes over time so‐called ‘product inflation’. Finally, the cumulation of individual choices may have the ultimate effect of changing consumer preference function themselves, in which event it is not possible for welfare economics to judge the optimality of market performance. These possible defects of the market may be conceived in the more familiar terms—as attributable to externalities, market imperfections or the defects of consumer sovereignty itself. Emphasis on the contribution influence of the smallness of the controlling decisions has the virtue of suggesting the possible necessity of substituting a ‘large’ for a piecemeal accumulation of small decisions if the results are to be intelligently appraised or improved.