Economic theory shows that the market is the most efficient way of allocating scarce resources!?

[Plamen B]

Is there a need for social/non-market housing in UK, what is their aim and to what extent these aims are being achieved in the UK?
Any useful sources will be much appreciated.

[simplicitus]

Not true. Classic economic theory shows that in a perfectly competitive market with no externalities and all goods being private and a single equilibrium, then the market allocates scarce resources with Pareto efficiency.

But:

1. There are no perfectly competitive markets.
http://en.wikipedia.org/wiki/Perfect_competition
And if the market isn't perfectly competitive, economic theory can tell you nothing about the result. It is NOT true that "almost competitive" markets will, according to economic theory, give "almost optimal" results - the theory is either optimal or not.

2. Even if there could be perfectly competitive markets in some goods, there couldn't be in housing. One of the requirements for perfect competition is that all the goods are homogenous. For housing, that can't be true - the three most important factors are "location, location, and location". Even if the houses themselves were identical, which they aren't, their location can't be. And, of course, it isn't just the house itself that counts but its neighborhood, the local schools, etc.

3. While the perfectly competitive market may give a Pareto efficient result, it does not necessarily give the most socially efficient result in terms of resource usage. Pareto efficiency is NOT social efficiency or even material use efficiency
http://en.wikipedia.org/wiki/Pareto_efficiency

4. In cases such Prisoner's Dilemma and the Stag Hunt, cooperation gets better results than competition.
http://en.wikipedia.org/wiki/Stag_hunt

The competitive market can't find the cooperative solutions. This not just theory - it turns out to be a real problem in economic development:
http://rajivsethi.blogspot.com/2010/08/h...n-sub.html
http://chrisblattman.com/2010/06/10/nugg...velopment/

Whether this shows that there is a need for non-market housing anywhere, much less in the U.K., is a different matter:

1. Even though there is no theory that says the market will give the most efficient results, that does not mean we have an economic model that will give better results in this case.

Governments and other non-market organizations can screw things up too. For a classic example, the Adarsh Society Housing scam in India:
http://en.wikipedia.org/wiki/Adarsh_Hous...ciety_Scam

2. Even if we did have a good economic model, would it be politically acceptable? Is seems clear that the current U.K. government doesn't care about what is good for the country - their austerity program is a disaster
http://www.cbn.com/cbnnews/world/2010/Oc...as-Future/
http://www.huffingtonpost.com/dean-baker...73660.html
So why would they accept any program on its merits?

3. Worldwide, public housing has had its great successes.
http://en.wikipedia.org/wiki/Public_housing
In places that people tout as great examples of pure market capitalism, such as Hong Kong and Singapore, most people live in government housing and have done so for decades. So social/non-market housing can be the right answer.

But public housing has also had its great failures. There is no guarantee that it will be done right - even if the people who design the project do their best to do it right! This article argues that one massive failure was due to having too many kids living there - who would have thought of that as a potential problem?
http://pressblog.uchicago.edu/2009/09/24...icago.html
(And, of course, there are countless incentives not to do it right)