Social Entrepreneurs Correcting Market Failures (A)

By James Phills, Lyn Denend
2005 | Case No. SI72A | Length 36 pgs.

In the most basic sense, a market failure occurs whenever the production or allocation of goods or services by a market is suboptimal. On one hand, this can mean that the output, price, or distribution of products is either inefficient in the sense that the overall level of economic value or social welfare could be increased (typically through transactions that should occur, but don’t even though they would create value or through transaction that do occur, but should not because they destroy value). On the other hand, it can mean that the resulting allocation is inequitable or inconsistent with values of justice or fairness. From a public policy perspective, such failures are of concern because the public interest or overall social welfare is lower than it could be if the market were functioning more efficiently or, in the ideal case, was what economists would characterize as “Pareto-efficient” or “Pareto optimal.” Traditionally, societies have looked to government intervention to correct these market failures. At times, when a market failure affected a population’s access to food, shelter, clothing, medical care, or other basic necessities, charitable organizations also got involved. However, private businesses were rarely called upon (or expected) to respond to breakdowns in efficient market operations by modifying their behaviors in a free-market system. However, a new class of actors has recently gained recognition. These individuals often found and manage organizations drawing on innovative ideas, using entrepreneurial skills, and leveraging market principles, but with one important difference from traditional entrepreneurs they prioritize social impact over the creation of wealth. By shifting their emphasis from financial to social returns, these “social entrepreneurs,” as they have come to be known, have been discovering and implementing new ways of creating social and environmental value by serving the needs of poor, disadvantaged, and neglected communities. In a world where a billion people earn less than $1 per day, and four billion people have an annual per capita income below $1,500 (the minimum necessary to sustain a decent standard of living), many observers see these social entrepreneurs as poised to play an increasingly important role in addressing important social problems. This case examines the insights, aspirations, and impact of three leading social entrepreneurs, their organizations, and their efforts to correct a diverse array of classical market failures: • David Green, of Project Impact, who developed an innovative approach to manufacturing low-cost, high-quality medical supplies to treat and prevent blindness and deafness in the developing world; • Victoria Hale, of OneWorld Health, who worked to develop new medicines for infectious diseases that killed millions of people in the poorest parts of the world; • Jim Fruchterman, of Benetech, who created technology-based projects that ranged from reading machines for the blind to innovative software to protect information (and the people who collect it) in the human rights field.

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