Thursday, May 19, 2011

On the Free Market

I'm generally a fan of the Free Market. To put it simply, I think that there is no better mechanism for allocating scarce resources. This is why I'm in favor of market based options to control carbon (a carbon tax or cap and trade) over command and control regulation. Ultimately consumers would be able to decide whether transportation or power generation via fossil fuels would be more valuable to them without government interference. At the same time I'm in favor of reducing or eliminating zoning regulations in most areas. That way people can decide what use of space, whether it's apartments or single family homes, works best for them.

But then, why am I so against privatization of things like schools or prisons? The simple answer is I'm against those things because they don't work. But if those things don't work why should a carbon tax? This is actually something I puzzled over. It seemed self evident that the magic of the market would work on things like reducing carbon, but not on reducing recidivism rates.

Finally, Matt Yglesias pointed out the answer. For those of you who didn't follow the link, he says that there's no "private sector fairy dust". The reason a carbon tax would work is that firms which provided undesirable uses of carbon (i.e. transportation via Hummers) would go out of business. When you privatize schools or prisons there's no guarantee that the firms which operate these facilities will go out of business if they're bad at it. These firms have an incentive to teach or imprison the most people they can as cheap as they can. Further, lobbying can be an effective way to increase your bottom line without increasing the quality of the product. This results in worse prisons or schools which cost more money. There's nothing magical about the free market, no "pixie dust".

Putting a private firm in charge of something rather than the government won't suddenly make it more efficient, and that's something a lot of policy makers, sadly don't realize. They think privatizing will make everything better, perhaps since schools will suddenly be run by Galtian Supermen. But that's just not the way the world works.


  1. Cap and trade won't work well. It will continue to allow big, polluting companies to do so as long as they can get carbon credits from small, ethically behaving companies.

  2. It's true that companies will still be able to pollute, but to get those carbon credits they will have to pay those ethically behaving companies. This will make dirty energy more expensive while rewarding companies that produce clean energy, making clean energy more lucrative to produce. At the same time, the number of credits issued (the cap) will shrink over time reducing the amount of carbon produced, making the credits even more expensive, and transferring more money to the ethical companies. Now the wall street traders facilitating this exchange will probably make out like bandits, which is one of the reasons I prefer a carbon tax. I doubt that a cap and trade system would fail though. After all, it worked in the early 90's at reducing the chemicals that cause acid rain.