Are certain goods and services, by nature, ill-suited for free markets?

Question

Please help me understand this. The “magic” of the market is supposed to lie in the ability of consumers to avoid spending money for goods and services when prices are high and, equally important, on the ability of manufacturers/providers to raise prices when demand is too high. If the price of fuel skyrockets (as it has already), consumers can drive less and use public transportation (to some extent). If my favorite fruit is an apple but then the price of apples increases 10-fold (without a causal increase in transportation or processing costs), I won’t starve because I can buy other food. If the price of a new television is outrageous, I don’t have to buy that television, or any other television for that matter. However, most people cannot reasonably opt out of using health care or electricity. So when managed health care tries to maximize profits, they often do so at a great cost to human life (or at least the quality thereof) and when the price of electricity skyrockets (as we saw with the whole Enron debacle) people can’t just start using candles and gas-powered generators to push back against market manipulation. If these are real concerns, do the policy makers who are such staunch free market advocates simply not understand these nuances or do they grasp yet gloss over them and frighten their constituencies using buzz-words like “socialism”?

Answer 1

Your point is valid and interesting. I presume you're writing in America where the free market is advocated staunchly and anyone who suggests government intervention is met with amazement and comments such as communist or socialist. If here in the UK a politician suggested wholesale privatisation of the NHS they would immediately lose the election such is the popularity of the service.

     I do believe there are certain goods and services which in the free-market can be abused in favour of firms. These are what in economics are known as natural monopolies. With a natural monopoly it is more inefficient to have more than one firm in the market. An example is the gas pipelines that provide gas to houses, factories and offices. If there was more than one network of gas pipeline, it would be highly inefficient and the competing firms would struggle to make profit. In these markets government intervention is desirable. So in the UK whilst water companies, the railway network (Network Rail), the gas pipeline network (Transco), the electricity lines (The National Grid) etc. are all privately owned natural monopolies, they are all still heavily regulated by the government or independent bodies in order to prevent them turning there consumer surplus into profit.

     Indeed if left to the free market some goods would not be provided at all. These are in economics called 'Public Goods' and an example would be street lighting. If left to the free market, street lighting would not be provided because of non-rivalry and non-excludability (see link below for more details).

     But overall the free market does allocate goods more efficiently than governments in almost every case. There can be market failures where consumers under value a good or service and fail to realise its positive externalities on society.

     I guess different countries societies and governments have different opinions about it all. The value one country places on healthcare will differ from another. I feel sorry for you Americans with your rip off healthcare while us Brits in our supposedly 'socialist utopia' get it free.  

Good question and hope that helps.

Answer 2

Most serious students of economics have observed that free market choices generally yield more optimum results than interfering with those markets. What you are suggesting is that we interfere in "certain" markets because we don't like the particular outcome. This is post hoc reasoning. I see an outcome I don't like and reason that it would have been better to interfere with the market result. Unfortunately, making those judgments in advance is not so easy -- or historically successful. History is littered with those who thought they had those kind of unique insights. If you look around the world you will see a distinct inverse correlation between market interference and wealth creation.