According to this theory, in individuals in a free exchange will pursue own interest and by doing so they will also promote the production of the common good that benefits the society as a whole. Individuals will exchange goods and services in accordance to own preferences. It follows the metaphor of the ‘invisible hand’, in which Smith describes how the selfishness of one leads to the social good. This view has benefited, if not everyone, almost everyone.Nevertheless, markets are bound to fail, market failures do occur either because markets are inefficient or the simple fact individuals fail to realise benefits of a particular product.
Firstly we can see that in the case of merit goods, a good that is better for one than the ones consuming it realises. Such goods are normally under-consumed because of the lack of information individuals have and the value judgement placed on them. Healthcare and education are prime examples of such goods. Healthcare creates more benefits than the person realises, it benefits not only him but also the society, as consumption of healthcare would stop the spread of diseases keeping the work force healthy. Another example education, individuals also make decisions about how much education to receive, or how much to allow their children to receive, not fully anticipating the full benefits received through being educated. The graph illustrates the case for a merit good.
Secondly, markets fail, as they are not efficient, resulting in mass production or underproduction, examples we have an overproduction of water and air but and under production of healthcare and education. Merit goods are normally under produced in a free market scenario. Having insufficient resources devoted to their production, the problem being the lack of information about the benefits of the product will results in insufficient demand being registered for the product in the market.
De-merit goods on the other hand will be over produced due to the value judgment produced on them by individuals. These are goods that are worse for the individual consumer than he/she realises. Resulting in too many resources being devoted to production of de-merit goods, leading to market failure i.e. production of cigarettes. Leading to the market being allocatively inefficient but can be blamed on individuals as they value judgement causes markets to produce such goods.
A public good, can be seen as an example of a common good, once produced it will benefit society as a whole, hence social good. Public goods can be distinguished by two characteristics- non excludable and non-rivalry- as once produced one cannot be stopped from enjoying the benefits and ones consumption does not diminish the benefits for others. Examples are street lighting and lighthouses. Nonetheless, a problem occurs in the market of whether the product is produced at all if left to marker forces as firm have no real incentive to produce for the social good. Although there may be demand for such products, where consumers are willing and able to buy, but the free market mechanism has failed to guarantee their production. Other problem is the concept of ‘free rider’ where consumer expects to get a free ride on the back of other paying consumers of a particular public good. Example being a lighthouse, rational fishermen will wait for one foolish fisherman to provide the light house and enjoys the benefits by not paying for it, so inrealtiy the lighthouse is never produced. Leading to market failure.
However, it can be argued that private markets, i.e. free markets, can be efficient, by looking at private healthcare all over the world, it is efficient in the sense that it provided what consumer want. Therefore, it is thought to be ‘allocative efficient’ producing at ‘P=MC’, price paid by consumers reflecting the true economic cost of producing the last unit, ensuring right amount of product is produced. In comparison to the UK healthcare system where both private and NHS is available, it can be argued that at present private healthcare is more efficient compared to the NHS, where government intervention takes place. Then again it provides a service for all disregarding their ability to pay.
Distribution of income and wealth is uneven, so firms in markets will mainly focus on the well off and their needs due to their ability to pay, rather than the needs of the society as a whole.
Lastly failure in the labour market will also occur in a free market, as healthy and skilled workers with high MRP’s will achieve success compared to unskilled with low demand, i.e. coal miners. Then occupational immobility is said to exist. In a free market, free training programmes for the unskilled will not exist.
So it all comes to the issue of social justice, in reality it will not exist if market forces are left to its won devices.
Free market does in fact lead to efficiency in certain are but for real the common good will not necessarily be provided and guaranteed by the free exchange of individuals. Some degree of government interception is needed to prevent negative externalities from de-merit goods i.e. cigarettes, to promote positive externalities by providing merit goods i.e. health care and education for all irrespective of their ability to pay. And to ensure the provision of public goods such as defence and street lighting. Through taxation governments can also ensure the redistribution of income and improve the mobility of labour, governments can ensure a fair and socially justified society.
Overall, free market ought to run through the forces of demand and supply but government intervention but not to the extent of communism, should also exist in ensuring the provision of the common good. It should be taken into account although market failures do occur so do government failure thus a balance between free exchange between individuals and government intervention will only generate the common good and not the reliance solely on free exchange.
12/11/2003 13:53 ucl28-ws157.ucl28
