Market Failure – or – why the free market doesn’t do everything (Part 3)


Some collective goods are things that a large number of people can use without using them up, such as radio waves or light houses.  Other types of collective goods are those that can’t be privately owned, like air, water and migratory wildlife. Collective goods are particularly susceptible to market failure. The classic example is the “tragedy of the commons.” A commons is a common pasture where everyone is allowed to graze their livestock without limit. This pasture will produce the most forage when the number of animals is optimum. But each farmer sees an advantage in adding one more animal, then one more and one more. The pasture gets overgrazed, then everyone suffers the consequences. Fisheries undergo this situation time after time. Each fisherman naturally wants to catch as many fish as possible, but when they do, the fish stocks decline, sometimes to the point of disappearance.

Free Riders

People can voluntarily pay for collective goods, like public radio and TV, but there will always be people who use them without paying. These are called “free riders.”  Pure self-interest would make everyone want to be a free rider, but then of course the service would not be funded. It is easy to be a free rider on the internet, reading articles from one publication or another without actually subscribing. On-line publications are still trying to figure out how to get users to pay.

Free Services

In previous centuries, many services that are now part of the marketplace were performed at home and no one had to pay for them with money. Families grew and cooked their own food, made their own clothing and bedding, taught their children and cared for the sick and elderly. Some families built their own houses and barns and provided their own transportation by keeping horses, mules or oxen. Over the years, manufacturing moved out of the home, textiles being a good example. Women no longer have to spend time spinning, weaving, knitting socks, making quilts and sewing clothes. Food is now making the same transition, as many young people no longer cook and restaurants and take-out food continue to proliferate. Education has been moved to schools, health care to hospitals. There are still some free services that many families provide for themselves, particularly child care and elder care. It becomes harder and harder for society to find a way to pay for these services when people want to transfer them to the market economy. Parents find that they have to spend nearly an entire salary to pay for child care; meanwhile child care providers are underpaid. And elder care can use up a family’s life savings, leaving nothing to pass on to heirs. When we try to monetize them, we realize that the value of the free services that families have been providing is staggering.

Ecological services are another vast array of non-market functions, only these are provided by the environment. For example, a forest on a hillside does a lot of good. The roots of the trees and the mosses on the ground absorb water and let it soak in or evaporate slowly. If you have ever seen mist rising from a forest during and after a rain storm, you can see this. You might also notice that streams coming from an intact forest run clean when it rains, whereas streams in urban or agricultural areas are muddy. The tree roots hold the soil so it does not erode and cause landslides. Because of the hillside forest, groundwater is recharged and flooding is reduced. Streams coming from forests are also more stable in their flow, providing water consistently. Streams in denuded areas are flashy and then dry up after the rain stops.

But there is no incentive for the owners of hillside forests to leave them intact. The ecological services they provide give the owner no income. We constantly hear about deadly landslides in one country or another, then a few days later some media outlet will report that there had been deforestation (almost as an afterthought). Centuries have gone by without anyone devising a good solution. Authors in ancient Mesopotamia, Greece and Rome wrote about how deforestation led to landslides, droughts, and the silting up of harbors. Wangari Matthai, the Kenyan Nobel laureate who championed forest preservation until her death in 2011, was still at it. She exhorted that “the mountains should be clothed in their dress.” But as long as money continues to be the sole motivation for action, the logging continues.

When Demand Reduces Supply

When a product is in high demand, the price goes up and the supply increases; so the law of supply and demand would like us to believe. But when the product is a wild plant or animal, the pressure caused by high prices can deplete the population. First the supply may go up because more people hunt or catch or collect the product. But eventually the population crashes. Rhinos are an example. They are in danger because their horn is popular for folk medicines, especially in China. The more scarce rhinos become, the higher the price poachers can gain from selling their horn; consequently, the rate of poaching increases. Like most large animals (whales, elephants, etc. ) rhinos reproduce slowly, and the race to obtain their horn may only end when there are no more rhinos.

Society can adapt to the depletion of natural resources. We use petroleum instead of whale oil, plastic instead of elephant ivory — and fake rhino horn is common in Chinese markets.  But the natural world is left poorer.