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what 3 problems in the free market work against the efficient allocation of resources?

March 29, 2013 //  by admin

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Comments

  1. simplicitus

    March 29, 2013 at 7:23 pm

    Have you thought about this at all? What would happen with no government? Are countries without governments or governments heavily involved in the economy rich or poor? Consider Afghanistan, Somalia, Haiti, Pakistan, etc.
    http://en.wikipedia.org/wiki/Failed_state

    1. The pure free market just doesn’t invest in public goods that the economy needs to thrive. Obvious examples range from roads to navigation satellites. The only reason the U.S. has a transcontinental railroad is that Congress bribed the railroad companies (call it a subsidy?)
    http://en.wikipedia.org/wiki/Pacific_Railroad_Acts

    The free market can’t even try to make major investments without government help. For example, the only way TransCanada and ConocoPhillips can get the land needed to build the Keystone pipeline is by using the government’s power of eminent domain. Ditto for any major urban redevelopment project.

    2. The pure free market doesn’t invest enough in goods with high positive externalities, such as education. Even advocates of capitalism such as Milton Friedman admitted the need for government intervention in education.
    https://webspace.utexas.edu/hcleaver/www/FriedmanRoleOfGovtEducation1955.htm

    3. The pure free market invests too much in goods with high negative externalities. Obvious examples are coal:
    http://green.blogs.nytimes.com/2011/02/17/tallying-coals-hidden-cost/
    tobacco
    http://money.cnn.com/2005/08/17/news/economy/secondhand_smoke/

    But, there are more than just three problems with the free market. In reality, all markets have the problem of asymmetric information, which means that none of them are ever efficient.
    http://www.lrb.co.uk/v32/n08/joseph-stiglitz/the-non-existent-hand
    http://www.princeton.edu/~dixitak/home/StiglitzFest_Dixit.pdf

    And even when all the parties do have all the information, when each works for his own benefit, the result is a lose-lose. Just consider Prisoner’s Dilemma and other coordination failures:
    http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/09/stag-hunt-and-macroeconomics.html
    http://en.wikipedia.org/wiki/Diamond_coconut_model
    http://en.wikipedia.org/wiki/Coordination_failure_(economics)

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