Market failure - short answer
Market failure - introduction
Explain the term market failure.
What is short-termism, and what is its role in market failure?
(a) Explain why environmental pollution is regarded as a source of market failure.
(b) Evaluate two different policies that a government might implement to reduce pollution.
Assess the arguments for and against subsidising public transport.
"The existence of a free market does not of course eliminate the need for government. On the contrary, government is essential both as a forum for determining the rules of the game and as an umpire to enforce the rules decided on.
What the market does is to reduce greatly the range of issues that must be decided through political means, and thereby to minimise the extent to which government need participate directly in the game. The characteristic feature of action through political channels is that it tends to require or enforce substantial conformity. The great advantage of the market, on the other hand, is that it permits wide diversity. It is, in political terms, a system of proportional representation. Each man can vote, as it were, for the colour of tie he wants and get it: he does not have to see what colour the majority wants and then, if he is in the minority, submit."
Source: Milton Friedman, Capitalism and Freedom (Chicago University Press, 1962)
"Freedom is indivisible. Once the state controls the means of production, distribution and exchange, all of us would become dependent on it." (1986)
"Hayek's insight is that against a background of stable laws, human individuals, left to their own devices, will produce an order spontaneously which is more complex and more stable than any which could be designed by the human mind. It's also an order ... which embodies their purposes and their goals. The moral defence of the market is that it protects freedom and voluntary exchange: whereas the moral hazard of economic planning is that it subordinates the purposes of some to those of the rulers."
John Gray (Oxford University, 1989)
All three quotes equate "freedom" with a market system. Explain the reasons that the authors would be likely to give for this.
In what ways might a market system not lead to greater "freedom" for all?