Antithesis of Market Capitalism– Market Failure: Government Intervention Vs. The Invisible Hand…

Market failure: As comfortable as you may be with the successes of market capitalism, you must also have an uneasiness about its failures; rising wealth inequality, long-term unemployment, threats to environment, out of control health care costs, workers inequality, consumer protection…

Hence, although free markets can fairly and efficiently distribute most goods and services, it may not be best system for all goods and services… According to Stan Sorscher; you can arrange the conventional mechanisms for market failure into two broad categories: Imperfect Markets and Misaligned Interests:

Imperfect (or Defective) Markets, e.g.; market domination, asymmetric information, inequity… Monopoly is an example of market failure by market domination; a monopoly can dominate a market and limiting choice for consumers… Asymmetric information is another example of a defective or imperfect market, which means no one person or group has insider information– ideally all buyers and sellers have the same information…

And another defect is inequity— markets often produce inequity… But, some economists object when they hear ‘inequity’ characterized as market failure. Rather, they hold that markets are not responsible for fairness. Fairness is a political or social issue, not an economic one. Nevertheless, some market rules magnify inequality, while other market rules results in greater fairness…

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Then there are– Misaligned Interests, e.g.; Externalities, Moral hazard… Economists believe that self-interest drives behavior, and market failure can occur when the public interest is not aligned with narrow interests of market decision-makers…

Externalities is the term used to describe shifting of costs or benefits outside of the market between buyer and seller, e.g.; carbon dioxide is dumped into the atmosphere, where the public pays extraordinary environmental costs, whereas the producer of carbon dioxide pays nothing for the free use of the atmosphere– this is classic market failure by externalities…

Moral hazard is when someone or an entity makes a market decision and someone else pays for it, e.g.; if a bank lends money to a borrower knowing that they cannot repay the loan and sells the bad loan to an investor, and this action insulates the bank from any liability, then the bank is guilty of a moral hazard…

In order to reduce or eliminate market failures, government can intervene and choose two basic strategies: One strategy is to implement policies that changes the behavior of consumers and producers by using price mechanism, e.g.; this could mean increasing the price of ‘harmful’ products, through taxation, and providing subsidies for ‘beneficial’ products. In this way, behavior is changed through financial incentives, much the same way that markets work to allocate resources…

Another strategy is to use force of the law to change or control unwanted behavior, e.g.; license sale of alcohol, tax sale of cigarettes, penalize polluters… However, Milton Friedman’s concept is skeptical of government’s ability to correct market failures through interventionist policies.. in fact, government often does not truly know what the ‘right outcome’ is in most cases, and government failure should be just as much a concern as market failure; therefore societal welfare would be best met by finding market-based solutions to misallocation of resources that sometimes arises under conditions in which externalities exist…

In the article Market Economies by Thomas Metcalf writes: Market economies are based on the laws of supply and demand; and left unfettered by government intervention and regulation, a market will theoretically find an equilibrium… Market economies are based on the concept that people are free to make their own choices about what services or products to purchase. In theory, market economies are efficient because a capitalist market system aims to produce goods with a minimum of wasted resources…

Rational people do not throw away resources or money, so producers work to maximize their profits by minimizing waste… Consumers likewise spend their money in ways that maximize their satisfaction… However, the downside of a market economy is that costs associated with production are not always paid by the supplier, for example; if pollution is a by-product of manufacturing it may not be factored into the price that a consumer pays for the product; these external elements are passed on to others who are not party to the production or sale of the product…

Also, market outcomes may not be equitable, e.g.; a rock star earns substantially more than a teacher because fans are willing to pay much more money for concert tickets, than for teachers salaries… Nevertheless, this outcome reflects the value that a market economy places on different services; a market economy produces what people want, and not necessarily what they need… Also, a market economy is ill-equipped to handle, e.g.; national defense, regulation of industrial safety, environmental protection in areas, such as; utilities, pharmaceuticals, food production, energy…

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In the article Market Failure: The Back of the Invisible Hand by Ernest Partridge writes: Some economists insist that the free unregulated markets always brings about the socially optimum result, hence the government should never interfere with markets. Furthermore, government should not own property, which is better managed by private individuals or groups:

In short: let the free market decide… An extension is the mysterious ‘invisible hand’ of the free market, which will promote the best wishes of everyone… (note: the concept of ‘the invisible hand’ has its origin in Adam Smith’s Wealth of Nations.) But practical experience tells us otherwise… it’s obvious that in numerous undeniable cases the unregulated free market fails to make everyone better off… And the reasons for the failure of free markets to produce optimal results for many societal issues is ingrained in its very nature– the driver for free markets is profits…

According to William Vanderbilt; the public be damned; I work for stockholders… Moreover individual entrepreneurs and workers also want and strive for what is best for themselves. Indeed, as any neo-classical economist will insist, personal satisfactions (i.e., profits…) is what drive market economy. Also, implicit in ‘market absolutism’ is the belief that– what is best for individuals and  corporations is also best for society at large…

Market absolutism is a dogma: Market– good; Government– bad: Period! Those who are not captivated by the dogma of ‘market absolutism’ know better: They trust the scientists who say that– pesticides damage the ecosystem, CFCs erode ozone in the stratosphere, continuing use of fossil fuels is changing the climate, smoking causes lung cancer and premature death (the cigarette packs tell us so, not because the tobacco companies warn us out of a sense of social responsibility, but because the government requires them to print the warnings)…

Government regulation, and laws restricting commercial activity, arise, not from dogma, but through accumulated practical experience and political action. As human institutions they are imperfect, which means, to be sure, they are sometimes excessive… According to James Galbraith; markets have their place; they are reasonably open and orderly way to assure the distribution of services and goods. They are not a general formula for expression of social will and the working out of social problems…

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Most everyone has an opinion as to what’s wrong with ‘free markets’, and what government should do about it: On one end of the spectrum are those who remain persuaded that government intervention in the economy inevitably distorts private incentives, and thus that ‘free markets’ function best when they are left alone.

In other words; If it ain’t broke: Don’t fix it… On other end are those who believe that government must be assertive to curb market excesses and rein in corporate power. In other words; It’s broken: Fix it now… A technocratic middle reconciles these two extreme viewpoints by invoking the concept of ‘market failure’. The logic is presumably simply: a role for government exists if, and only if, a market failure exists.

The burden for policy lies in establishing the nature of the market failure, and then specifying the mechanisms by which it can be corrected… Whereas, many have an exaggerated opinion of what markets can achieve. They think of markets (and more so, free markets) as some magical force that acts in the best interests of society and makes all people better off in the end…

Consider that a market is not a moral entity that can be judged as right or wrong; a market cannot make decisions or take actions; a market is simply, information sharing. People provide information about things they have for sale, and other people can choose to buy it or not, but the market itself is not a moral actor, because it does not act or make decisions…

Market failure exists when the competitive outcome of markets is not efficient from the point of view of society as a whole. This is usually because the benefits that the free-market confers on individuals or businesses carrying out a particular activity diverge from the benefits to society as a whole… Some experts suggest that market failure is an economic concept that justifies government intervention in economic activities… Others suggest that market failure considers health of the whole economy and not just isolated economic actors…

According to some economists; one of the issues with government intervention is that it can also contribute directly to the failure, and thus makes the problem worse by failing to allocate resources appropriately… Knowing how and when to intervene is a difficult decision that is complicated by political and social issues, and the people and institutions involved in the decision-making…

Government justifies intervention in the name of public interest, whereas some economists argue that government should not even attempt to solve market failures, because the costs of government failure might be worse than the market failures it attempts to fix…