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.


Posted on February 8, 2012, in Economics, Politics. Bookmark the permalink. 8 Comments.

  1. ephemeral_reality


    Both the arguments you present are conventional and can be easily countered.

    Please consider this:

    Human systems do not maintain themselves, and are almost never self-improving, but rather given to entropy, manipulation, and deterioration.

    The market left on its own will always be hijacked by crony capitalists who establish rent-seeking for their benefit. A prudent Government will put the public’s best interest ahead of the crony capitalists.

    What you are arguing for — the free market is a myth. doesn’t exist.

    • The market isn’t left on its own at the moment, and has been hijacked by crony capitalists regardless. Therefore your argument is completely irrelevant.

    • “Human systems do not maintain themselves, and are almost never self-improving, but rather given to entropy, manipulation, and deterioration.”

      The government is a human system. You are arguing against yourself.

      And just in case there is some misunderstanding (in either direction), what I am arguing for is a free market where private property and contracts are respected and enforced and fraud and theft are not allowed. I am assuming you are arguing there is need for a government. A government, I am fine with. The State I am not. The only conditions I have are that the government is completely voluntary and the only two goals it carries out are protection against theft and fraud (the second condition is not a necessity because it does not have to follow the voluntary formation of government but I would prefer that it would).

      You are, meanwhile, arguing for the necessity for the State. The only difference between your position and mine is that the State is not formed voluntarily and that arbitrary rules and regulations may be made and the citizen’s private property may be taxed without their consent.

      • ephemeral_reality

        /* The only difference between your position and mine is that the State is not formed voluntarily and that arbitrary rules and regulations may be made and the citizen’s private property may be taxed without their consent.*/

        So your point is that all rules /regulations established by the State are arbitrary?

        Without regulation, anarcho-capitalism will completely deteriorate.

        Secondly: I have a serious issue with land as private property. Looks like you argue from a “Royal Libertarian” position.

        Here’s some thoughts opposing this:

        Government must be established and laws provided, before lands can be separately appropriated and their owner protected in his possession. Till then the property is in the body of the nation. – Thomas Jefferson

    • After reading your link, I realized you did misunderstand my ultimate goal (which obviously doesn’t appear in this post). I am arguing for rules, but only two: protection against theft and protection against fraud.

      • ephemeral_reality

        /* I am arguing for rules, but only two: protection against theft and protection against fraud.*/

        Not sufficient.

        As soon as the game is underway, successful capitalists are constantly pushing the envelope of the rules, seeking to establish rents, monopolies, unfair advantages, and debt traps to snare the bulk of the players and stifle the profit-eroding tendency of real competition.

        What you need is a Government that constantly imposes restraint on privilege. And that is the purpose of society and the law in the service of freedom.

    • Regarding land as private property, all objects are land. The keyboard you are typing on was once part of the land. Someone combined the land with labor and sold it to you. That’s how it become the object of your possession: your property. What’s the real difference between land and your keyboard? You can’t easily move the land from the earth. If I can dig up a piece of land and move it away from the rest of the earth, am I allowed to own it now?

      Property rights exist to eliminate conflict. The reason an individual is able to own a spoon for himself is because if no property rights were assigned, another individual could come and attempt to use the spoon: conflict would arise. The same thing would occur with land.

      I don’t know why though, you would call me a royal libertarian after I explicitly state I believe the State is immoral and should not exist.

  2. What’s real competition? What’s an “unfair advantage”? After all, competition involves creating advantages against your competitiors. It wouldn’t really be competition otherwise.

    And I’ve read that article before. I suggest you look at this

    When government does so-called “regulation,” they end up not protecting against fraud and theft. These are two of the biggest real-regulations that must be taken care of for capitalism to be true capitalism. State capitalism does not work, and you see evidence of that today.

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