Friday, December 13, 2013

The Spherical Cows of Economics

Some conservative oppose all regulations by appealing to the free market. They say the free market is the best way of distributing goods, and any regulation makes it less free. Therefore regulations make the market less efficient, which is bad.

However, the free market is only efficient under certain conditions. For example, everyone involved has to have perfect information about the costs and benefits of their decisions. Another is that there must be no externalities, that is, all the costs and benefits of a decision must be borne by the people making the decision, not by third party bystanders.

The thing is, these conditions rarely, if ever, actually hold. They're the spherical cows of economics. And the free market is inefficient to the extent that these conditions are false.

But government regulations can help improve these conditions, and thus make the market more efficient. For example, by requiring drug manufacturers to disclose their drugs' side effects, they can help lessen information imbalance, allowing people to make more rational decisions. Further, they can use taxes and subsidies to internalize the costs and benefits of externalities.

So regulations do not make the free market less free. In fact, the free market needs regulations to be free.

1 comment:

  1. What truly surprises me is that more people probably know what spherical cows are than that free markets ARE spherical cows. I liked this article.