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Monday, September 30, 2013

Free Markets Should Be The Default Position - Many Supposed Market Failures Aren't

     Dan Hannan who is as libertarian as anybody in Parliament, while writing strongly in defence of market freedom listed 3 cases of market failure:

    "I can think of three important exceptions. One is where the externalities are diffused, making it hard to identify a specific victim: acid rain, say, or leaded petrol. A second is where the cost falls upon something other than a legal person – the suffering involved in battery farming, for example. A third is where ownership rights alone cannot prevent the depletion of a resource: quotas to keep fish stocks sustainable are the obvious instance. In these cases, even the most ideological libertarians generally allow that state regulation is beneficial."

    The thing is that I found 1 1/2 of them wrong and commented (a week ago today).

   "Looking at Dan's 3 exceptions:

Fishing is an example, not of market failure but of the failure of a lack of market. This is a "tragedy of the commons" situation where, because nobody owns the fish, nobody has the incentive to conserve. the best solution would be establishing property rights - selling an appropriate number of licences for particular areas & times and using GPS monitoring to police it.

As regards acid rain - this has been proven a false scare, though obviously among the journalists, beeboids and ecofascists who promoted it only those who were in any slightest way honest ever reported it when it was found to be a bust.

Anybody ever seen a journalist, beeboid or "environmentalist" who was in any way honest? me neither which is why nobody much has heard that "acid rain" actually turns into nitrate fertiliser which helped the trees.
Which is why the story disappeared from the news.
So only 1  1/2 out of 3 left. Now if Dan, a who is as market orientated as one is likely to meet has fallen for these as part of the only examples of market failure it shows how rare such failure is, how often apparent failure can be solved simply changing the rules a little and how strongly our culture has become biased against having market freedom as our default position."

      Underlining added because that is the main point I was making. I suggest that free markets should always be the default position until a conclusive case has been made of a market failure which cannot be dealt with in an easier way.

     This does not mean that I believe the market never fails and I mentioned 3 cases, different from his, where I believe it does.

    "Just in case anybody thinks I am an absolute libertarian I consider the advertising industry a market failure (it makes money by increasing rather than satisfying demand); the news media to (the big profits are made by gaining political brownie points, but unfortunately state owned media are a far worse failure than privately owned); and that X-Prizes are needed to address the market failure to adequately reward invention, which is the ultimate source of virtually all wealth."

    In the case of news media it is because gains from political schmoozing are not included and if government had less power and were spending less of the money and if less of government's power were personal decision making and more laws to which even the state defers, those gains would be reduced, though not eliminated.

   In the same way X-Prizes are a way of making up for the failure of markets to defend inventor's rights to the wealth they create as well as the other factors of productivity are rewarded - a failure I think is inherent because their contribution is less tangible. I have said that X-prizes should be awarded up to 3 times what patents currently provide. 

    Even advertising sometimes is worthwhile if it brings people's attention to new products they would not have heard of and would like. It is only when it is trying to persuade you that not having their product makes you less sexually desirable, happy, or otherwise socially undesirable.

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Free versus fair ? - clearly very few markets are truly "free" if you apply the yardstick that both buyer and seller are equally free to decline. Whilst you may refuse to buy what is on offer in one supermarket in favour of another, they seldom engage in a bargaining negotiation with the customer, and whilst in competition for your business, they moderate their pricing so as not to escalate a price war which they might not win without financial damage that could leave them vulnerable to other rivals. The effect is of an uneasy cartel. Recent price differences between the price of petrol at the supermarkets in Stirling and Perth, which ( Stirling) being nearer to the refinery at Grangemouth should be cheaper to supply, shows that the competition is less fierce in Stirling.
I think the reason for that is that the supermarkets treat petrol as a loss leader (& can afford to because they make profits elsewhere) pulling in extra customers.

In a way this is a failure of Adam Smith's free competition but one that benefits the petrol customer.

If we had government regulating the market what would probably happen is that they would get lobbied by the retailers to ensure a "fair" market price by preventing supermarkets undercutting. Milton Friedman examined how the FCC in America, originally started to ensure railways priced "fairly" rather than being cheaper where there were competing lines, and ended up enforcing minimum prices.
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