Soham Patil
July 17, 2024
A prominent topic that economics students anywhere cannot avoid is market failure.
Students everywhere are taught that the free market is inherently unstable and causes problems that can only be fixed through legislation and regulation.
As a result, most of those who take an economics class come out of it believing that the state helps counter the shortcomings of the free market.
However, the concept of market failure is fallacious as it is based upon faulty economic reasoning.
Belief in market failure is often complementary with seeking to promote politically desirable goals rather than to promote economic growth.
First, a free market operates on freedom of association and property rights. Therefore, for any transaction or exchange to be conducted on a free market, it must be voluntary.
Further, if both parties agree on an exchange, then both parties must assume that the exchange is beneficial to themselves.
Whenever consumers buy a product, they value the product more than the money they pay for it. Similarly, the store sells them the product since it values the money earned more than the loss of the product that they sell to consumers.
It may be the case that one party is mistaken and ends up not preferring the exchange retroactively, but this is not a determining factor in the choice to transact.
Through this process, value is created through free markets. As people are free to interact and exchange, they make mutually beneficial trades that benefit both parties.
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