Must-Read: Mark Thoma: The Problem with Completely Free Markets

Must-Read: So when I go back onto the Econ 1 teaching line in the spring of 2016, how do I organize (a) the excellences of markets, and (b) the failures of markets? Reich and Tyson have a nice four-part typology: 1. government creates markets, 2. government corrects markets, 3. government distorts markets, 4. government supplements markets. Is that the way to go?

Mark Thoma: The Problem with Completely Free Markets: “Republicans… believe that markets free of government rules and regulations…

…almost always outperform markets where the government is involved. So it’s a good time to review why this faith in free markets is sometimes misplaced…. But we shouldn’t confuse free markets with competitive markets. When there are significant departures from pure competition, what economists call market failures, markets are ‘free’ to perform very badly, and sometimes a market will collapse entirely…. The conditions for textbook competitive markets are fairly strict… numerous participants… perfect information… weights and measures [that] are accurate… free of externalities… [free of] principal-agent problems… free of moral hazard and adverse selection problems…. If a private firm asked you to pay for national defense, why would you say yes? If everyone else pays, you will still be protected, so why pay yourself?…