Societies should not rely on market forces to protect the environment or provide quality health care for all citizens, a winner of the 2007 Nobel Prize for economics said on Monday. … “The market doesn’t work very well when it comes to public goods,” said [Professor Eric] Maskin …
Mechanism Design Theory is one explanation for why even a well-regulated market with external costs priced via Pigovian or green taxes is inadequate in areas like environmental performance or health care.
Certain types of goods — public goods — simply cannot be allocated efficiently through market mechanisms alone. This was known long before Mechanism Design Theory came along.
For example, the U.S. spends more on healthcare than any other nation, and gets worse results. There are various reasons for this, but one is that a competitive market in health insurance tends to provide more insurance and less healthcare than public insurance mechanisms.
This is relevant to arguments over solving global warming, because a great many emissions involve public goods. For example, transmission lines are public goods; transportation infrastructure (roads, seaports, and airports) is a public good; pipelines for water and fuel are public goods.
A lot of people like to argue that markets helped liberate us from feudalism, but they are overlooking an important point: what liberated us from feudalism was capitalism, and capitalism never relied on markets alone.
Let’s look just at the U.S. for the moment. To make the most favorable case for “pure markets,” let’s overlook, for the moment, slavery, stolen land, and so on. Capitalism has always depended on public goods — a post office, a public currency. Since early in U.S. history we have had a public banking system, though there were fights between those who wanted a national bank and those who wanted state banks. And of course there is the history of transportation; canals came early in our history, then railroads, then a highway system. We had public education in New England almost from the beginning of our nation; it spread to the entire country after the civil war. We tried private fire departments; ultimately they did not work out, and no one (excluding some of the loonier libertarians) object today to public fire departments or claim they should be turned over to the “free market.”
In short, capitalism has been a mixed economy from the beginning. It always depended on substantial public goods; it could never have grown and flourished if everything had been left to a market. There is a good argument to be made that we fetishize markets today. Yes, people like Peter Barnes are right that there is room for a third sector between public and private. But it is also true that there are many things the public sector can do well, and that hatred of all government and public spending handicaps our ability to do many of these things.