Monthly Archives: February 2012

Market Failure vs. Government Failure

A common argument used against a free market economy is that consumers are irrational and that therefore, government should step in when consumers cannot make correct decisions for themselves. This argument overlooks the fact that it’s not consumers per se that are irrational, but rather individuals. Individuals make mistakes. It is a part of human nature, not something intrinsic only to consumers.

So as likely as individuals are to err while making decisions for themselves, it is even more likely for an individual to err while making a decision for another individual. Government, being a group of individuals, is not devoid of this characteristic.

However, government does have two distinguishing features that the market lacks. In many situations, you cannot tell if a policy succeeds or not. Does it really benefit everybody? Does it even benefit anybody? Was more money put in than the resulting benefits received? In the market, a business receives profits when it is of net benefit to society. It goes bankrupt or receives losses when the opposite is true. In government, there is frequently no easy way to tell whether a policy is successful or not.

The second feature involves the blame when a policy clearly goes wrong. In the marketplace, the blame is obvious: it is the business the consumer buys his product from. In cases of fraud, the consumer can sue the business, while in cases of the consumer simply making an error, he can choose not to buy the product again, and relay his experience with other consumers. In government, the politician can easily blame the failure of his policies on the bureaucracy or a lack of information. Or perhaps the reason the policy didn’t work is that there simply wasn’t enough money. So we need more money! Surprisingly enough, the policy still doesn’t work. We need even more! (I think you get the point)

The next common argument made against the free market is that of externalities, unintended “side effects” of the marketplace. Two types exist: positive externalities and negative externalities. An example of a positive externality would be a lady buying lights from the store and decorating her house with it during the Christmas season. In this case, the positive externality would be the benefit the neighbors get from being able to see the decorations of the lady’s house, which they don’t have to pay for. As for negative externalities, the largest example happens to be one that shouldn’t even be considered an externality: pollution. For example, a factory, while creating its own product, emits a pollutant, that harms the people living in areas nearby. The factory does not have to pay for the damages it commits.

Libertarians understand that pollution is an act of violence. Just as if I accidentally stab you with a knife, I have committed an act of aggression, if a factory “accidentally” releases a pollutant that harms you, they have as well. As such, in a libertarian society, individuals would be protected from pollution through property rights. If you pollute my property (including my body), I have the right to sue you.

So when it comes down to it, the externality argument is at worst, like in the case of pollution, plain wrong. And at best, it’s silly and ridiculous. If you think the government should step in to encourage Christmas house decorations, then perhaps you should get on my case.