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The free market produces the most efficient outcome

kibwen 4y ago
Sadly, no. Or it does, but only if one defines "efficiency" tautologically as "what a free market would do", which is sadly too common. There are many factors that contribute to inefficient markets, one of which is information asymmetry among the participants. Keeping markets efficient takes work, and, indeed, sometimes requires regulation.
tzs 4y ago
It produces a maximally efficient outcome (by some definitions of efficient) if various requirements hold about the market, the goods in the market, and the market participants. Almost all real markets deviate from those requirements. Sometimes these deviations aren't enough to prevent the market from producing close to maximally efficient outcomes, and sometimes they are enough to make the market produce outcomes nowhere efficient. This is one of the reasons why an economics degree requires coursework beyond Economics 101. :-) Economics 101 is the equivalent of Physics 101 where we mostly ignore things like air resistance and friction or Electronics 101 where we ignore things like parasitic capacitance and parasitic inductance of component leads and keep frequencies low and time scales long enough that we don't have to worry about speed of light delays between different sides of our circuits. It's the courses after the 101 courses were you start to get messiness that is the real world of economics or physics or electronics. Anyway, when a real world free market deviates from the requirements to produce a maximally efficient output one of the ways to make it work better is to use regulation to try to make it behave as if the missing requirement held. A good example is when you have a good that costs the maker a significant amount to make but that anyone can easily copy perfectly at close to zero cost. A free market will tend to not be efficient for that good because makers have trouble making a profit (or even staying in business). Consumers pay near zero for their copies and so can consume as much as they want, which makes them happy, but there will be much less variety available than consumers want. A long time ago the approach to that was to just not have a market for that kind of good. Makers would find some rich patron who was willing to pay to have new goods made. Free copies might still be made for the masses, but the rich patrons gained social status among their peers by being patrons of famous makers so would keep patronizing makers. A regulatory fix is to make it so only the maker is allowed to make copies of their goods. You can then have a decent market in those goods. It's still not ideal because although it solves the problem of the market getting makers to make it does raise the price to consumers above the theoretical free market price which should be near zero. Another approach would be to have the government pay the makers, and then let anyone freely make copies. This is probably the way to get closest to maximal efficiency but it raises the problem of how to have the government decide with makers to support. One approach to that is to try to track which things consumers are actually using, and then pay the makers proportionally to that usage. Another issue with that approach is where should the money for the makers come from? It could come from general government revenues but then you have the problem of deciding how much should be used for this. Also you will have people who don't like these kind of goods and object to their tax dollars going to support them. Another approach is to tax use of these goods to fund the makers, or tax something that correlates well with use of the goods. Let's not overlook that an approach that requires tracking of consumer use might require surveillance that, in the hands of someone who wants to do something less benign than just figure out how to allocate maker pay, could be used for evil purposes. That might be too high a price to pay just to get the most efficient levels of production and consumption of this particular good. Real economics is complicated and messy.

Sadly, no. Or it does, but only if one defines "efficiency" tautologically as "what a free market would do", which is sadly too common. There are many factors that contribute to inefficient markets, one of which is information asymmetry among the participants. Keeping markets efficient takes work, and, indeed, sometimes requires regulation.

tzs 4y ago

It produces a maximally efficient outcome (by some definitions of efficient) if various requirements hold about the market, the goods in the market, and the market participants. Almost all real markets deviate from those requirements. Sometimes these deviations aren't enough to prevent the market from producing close to maximally efficient outcomes, and sometimes they are enough to make the market produce outcomes nowhere efficient. This is one of the reasons why an economics degree requires coursework beyond Economics 101. :-) Economics 101 is the equivalent of Physics 101 where we mostly ignore things like air resistance and friction or Electronics 101 where we ignore things like parasitic capacitance and parasitic inductance of component leads and keep frequencies low and time scales long enough that we don't have to worry about speed of light delays between different sides of our circuits. It's the courses after the 101 courses were you start to get messiness that is the real world of economics or physics or electronics. Anyway, when a real world free market deviates from the requirements to produce a maximally efficient output one of the ways to make it work better is to use regulation to try to make it behave as if the missing requirement held. A good example is when you have a good that costs the maker a significant amount to make but that anyone can easily copy perfectly at close to zero cost. A free market will tend to not be efficient for that good because makers have trouble making a profit (or even staying in business). Consumers pay near zero for their copies and so can consume as much as they want, which makes them happy, but there will be much less variety available than consumers want. A long time ago the approach to that was to just not have a market for that kind of good. Makers would find some rich patron who was willing to pay to have new goods made. Free copies might still be made for the masses, but the rich patrons gained social status among their peers by being patrons of famous makers so would keep patronizing makers. A regulatory fix is to make it so only the maker is allowed to make copies of their goods. You can then have a decent market in those goods. It's still not ideal because although it solves the problem of the market getting makers to make it does raise the price to consumers above the theoretical free market price which should be near zero. Another approach would be to have the government pay the makers, and then let anyone freely make copies. This is probably the way to get closest to maximal efficiency but it raises the problem of how to have the government decide with makers to support. One approach to that is to try to track which things consumers are actually using, and then pay the makers proportionally to that usage. Another issue with that approach is where should the money for the makers come from? It could come from general government revenues but then you have the problem of deciding how much should be used for this. Also you will have people who don't like these kind of goods and object to their tax dollars going to support them. Another approach is to tax use of these goods to fund the makers, or tax something that correlates well with use of the goods. Let's not overlook that an approach that requires tracking of consumer use might require surveillance that, in the hands of someone who wants to do something less benign than just figure out how to allocate maker pay, could be used for evil purposes. That might be too high a price to pay just to get the most efficient levels of production and consumption of this particular good. Real economics is complicated and messy.