Market forces vs command and control

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Markets are a simple mechanism allowing a complex set of interactions to take place, to find the optimimum price for a good or service.

Ideal markets:

  • assume perfect knowledge on the part of participants.
  • have no externalities

Markets in combination with regulation can be used to deal with issues that are normally a case of market failure, such as pollutants. Sulfur emissions became the subject of a trading scheme in the US, giving a financial incentive to reduce emissions. Similar results are hoped for through carbon trading - although this is a more difficult case in that the main greenhouse gas, carbon dioxide, is the main and unavoidable product of fossil fuel use, rather than a byproduct like sulfur (which could be scrubbed out or avoided through changing fuels).

FA Hayek, most famously in his book The Road to Serfdom, advocates for the use of the market in basically all things. His book was very influential on conservate political leaders including Margaret Thatcher and Ronald Reagan. He argues that markets are the most efficient in setting prices - which many economists would agree with, but with some clarifying points. Hayek does not address the issue of externalities in this book (though there may be some argument over whether he does), thus failing to address the single most blatant problem with markets and market failure.

The blog post by Voltzman, Nanny state's bright idea: ban the light bulb, gives examples where command and control is the most practical way to deal with problems, such as reducing road accident deaths.

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