7 Important Examples of How Markets Can Fail (Mark Thoma, Fiscal Times)

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http://www.thefiscaltimes.com/Columns/2013/06/18/7-Important-Examples-of-How-Markets-Can-Fail.aspx#page1

Many people on the political right believe that free markets are the solution to most any problem. For example, Senator Pat Roberts (R-KS) introduced yet another attempt to repeal Obamacare with a call to “start over … with true, market based reforms.”

​Free, unregulated markets are not always the answer, however. It’s true that competitive markets have desirable properties, but very special conditions must be present for competitive markets to emerge. When these conditions are not met, as is often the case in the real world, free markets can perform very poorly. In these cases – as illustrated in the following examples – government intervention that eliminates troublesome “market freedoms” can often be used to move these markets closer to the competitive ideal.

1. Retirement Security. The main market failure in retirement insurance markets is called “moral hazard” – people who will not save for retirement because in they know that a compassionate society will give them enough to survive in any case. The solution is to force people to save some of their paychecks each month so that, even if it doesn’t fully cover their retirement expenses, at least they’ll contribute something.

Of course, we already have a system like this, it’s called Social Security, and the main task ahead is to protect this important program from calls to reduce it, eliminate it, or to place it in the hands of the private sector.

2. Health Care Markets. There are two important market failures in the health care market. The first is moral hazard, and it is much like the moral hazard problem in retirement insurance markets. If people know that society will care for them if they break a limb, have a life-threatening disease, and so on – if they can always go to the emergency room at someone else’s expense – many will choose to go without insurance. A solution to this problem, one that is part of Obamacare, is to force everyone to buy insurance and contribute to the care they get.

There are many other market failures in health care markets, e.g. patients not knowing enough about treatments to be informed consumers, and all of them can be mostly resolved through government managed health care systems such as those adopted in other developed countries.


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