Market Failure – or – why the free market doesn’t do everything (Part 1)

The free market is unmatched in its ability to allocate goods and services. No government has to tell it how many tee shirts to produce and in what colors; how many refrigerators, or what kinds of Christmas toys. The free market works through creative destruction: if someone starts a company that is well-managed and produces what customers want, that company will prosper. If it doesn’t, it will go out of business. As a result, we have an endless supply of goods and services to choose from, and even “unpleasant” jobs are taken care of: we can hire someone to clean a septic tank or unclog a drain. The system gives us jobs and money, and with that money we can start new businesses and bring new ideas to market. What more could we want?

We could want a lot of things that are not part of the marketplace because they can’t be bought and sold. This is where free market purists go wrong. The marketplace is only a small part of the whole of life. It can affect the rest of life in positive or negative ways, or maybe not at all, leaving some needs unmet. When the negative effects are bad enough, people demand that they be controlled. Let’s look at a few examples.


FREEDOM. The free market sees no difference between owning machinery, animals, or humans as means of production. Slavery and serfdom were common throughout history and still exist in many places today. But we in America believe that every human has a God-given right to freedom.
MORALITY. The free market will produce pornography, and lots of it, because that’s where the money is. Most people agree that porn is bad for kids and too much of it can degrade a society. A similar situation exists with drugs. A good way to make money is to get people addicted to drugs and then continue to sell them drugs, since they will do anything to maintain their habit. The truth is that the free market is totally amoral. Goods and services simply go where the money is regardless of the impact on society.

AIR, WATER, WILDLIFE. These are called common property resources because they move across property boundaries. In an unregulated situation you don’t have to pay to take water out of a stream or well, and you don’t have to pay to put pollution into it. Naturally, then, people will deplete and pollute water supplies. The costs are borne by those who want to use the water and can’t because it’s unusable. Some people get the benefits, different people pay the costs. So we need to prevent pollution with regulations. Similar situations exist with air quality, wildlife and other resources. Hunters know that hunting seasons and bag limits are essential to maintaining a sustainable game population; otherwise the game would be overhunted and disappear.

QUALITY OF LIFE. Quality of life is like a common property resource too. The way our neighborhoods look, smell, and feel, and how safe they are, all these things are a by-product of the actions of individuals and companies. Sometimes the quality of life is enhanced by cheerful shop windows and outdoor cafes. Sometimes it is degraded by noise, garish signs, traffic etc.

Let’s say we live in a libertarian society where everyone dumps their garbage into the streets. The streets then look and smell terrible, but no one sees a way to make money cleaning it up, so no one does. If some people hire garbage haulers to remove their trash but the rest of the people continue dumping, not much will change. That’s when a government of sorts will start to form. A majority of the people can vote to force the rest to pay for garbage pick-up , or levy fines on those who don’t dispose of their own trash properly. A libertarian society probably wouldn’t last too long.

The old adage, “The best things in life are free” can go in one ear and out the other. But when thinking about non-market values, it becomes clear. Some of the things you can’t buy are the things you want most.

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