Art Carden and Steve Horwitz on Market Failure and Government Intervention
Externality problems are market ‘failures’ only in comparison to the perfectly competitive model’s equilibrium. In other words, the ‘failure’ here is not that markets ‘do not work’ in practice, but that they fail to live up to a blackboard ideal.
Understanding “market failure” and the omnipresence of negative externalities can lead us to make the comparison that does matter. Implicit in negative-externality arguments for intervention is the claim that the political process will actually do what economists say itshould do. That is, politicians will impose the blackboard solution. However, the public choice5 revolution that began in the 1960s has challenged that assumption by showing how governments also fail. Politicians’ self-interest, combined with the limits to their knowledge, mean that they likely will not and cannot produce the ideal outcome. We are left to ponder which of two imperfect systems will serve us better: the “failed” market or the “failed” political process. We have many reasons to think that markets will outperform government in this regard, even in less-than-perfect conditions. One approach sees every “market failure” as an opportunity for entrepreneurs to solve a problem and discover, through profit and loss, how well they have done. Political processes do not have the requisite incentives and knowledge-conveying processes to do as well.
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