Free Markets: Why Governments Intervene
Free Markets: Why Governments Intervene Free markets have often been idealized in the US, and have become a dominant tool for trade and distribution of goods and services. There have been multiple waves of government regulation and deregulation of the market in US history. Each of these trends have been grappling with the central question of how sufficient markets are at satisfying our goals. In theory, free markets are fair and efficient at distributing goods and services. In reality, however, government must intervene in the marketplace for two overarching reasons. First, because in practice free markets left to themselves are not always fair and efficient. And second, because fairness and efficiency are not our only goals and values as a society.
Market Failures The hypothetical purely free-market model is what Weimer and Vining call the Idealized Competitive Model. It is a starting point from which one can examine the shortcomings of a pure free market system. The model assumes that all individuals have perfect information of goods, services, and exchanges, and that they make rational trade decisions to maximize their own utility. Firms, acting to maximize profits, are in perfect competition with one another, with many buyers and sellers in any given market. Individual firms and individuals are able to move around freely, and all costs and benefits of all exchanges are accounted for in the prices. The overarching ideal and goal of this model is for Pareto efficiency, in which the allocation of goods and services optimizes social surplus (the combined amount of benefits felt by producers and consumers in an exchange). In other words, a particular allocation of goods that is Pareto efficient cannot be modified without making at least one participant worse off (Weimer and Vining p. 56). Economically speaking, the idealized free market model is perfectly fair and unbiased, aiming to maximize all individuals' social surplus. Clearly, the ideal of
Market Failures The hypothetical purely free-market model is what Weimer and Vining call the Idealized Competitive Model. It is a starting point from which one can examine the shortcomings of a pure free market system. The model assumes that all individuals have perfect information of goods, services, and exchanges, and that they make rational trade decisions to maximize their own utility. Firms, acting to maximize profits, are in perfect competition with one another, with many buyers and sellers in any given market. Individual firms and individuals are able to move around freely, and all costs and benefits of all exchanges are accounted for in the prices. The overarching ideal and goal of this model is for Pareto efficiency, in which the allocation of goods and services optimizes social surplus (the combined amount of benefits felt by producers and consumers in an exchange). In other words, a particular allocation of goods that is Pareto efficient cannot be modified without making at least one participant worse off (Weimer and Vining p. 56). Economically speaking, the idealized free market model is perfectly fair and unbiased, aiming to maximize all individuals' social surplus. Clearly, the ideal of
References: Wiemer, David L. and Aidan R. Vining (2005) (5th edition). Policy Analysis: Concepts and Practice Stone, Deborah (3rd edition, 2012). Policy Paradox: The Art of Political Decision Making