1. The market: efficiency, but also externalities
Markets are generally beneficial for the organisation of economic life, as – under ideal conditions – they lead to the efficient allocation of scarce resources. Efficiency is the absence of waste, which is in the public interest.
Under competitive conditions, goods are produced by those who have the lowest costs. And they are consumed by those who value them most highly. In this way, markets maximise overall welfare. For this ideal outcome to actually materialise, there must be transparent, competitive markets with free price formation.
If third parties not involved in the economic transactions on the market are adversely affected, the ideal situation described by welfare theory does not materialise. These negative external effects of economic activity pose a problem of the (un)fair distribution of the benefits and burdens of economic activity.
It would appear that negative externalities have tended to increase rather than decrease with the economic development of nations. The market economy therefore needs an ethical framework precisely because of its economic success – because the environmental and social cost of this success is increasingly borne by those who are not involved in the market processes that caused it, and who therefore derive no direct benefit from the economic transaction.
Where the market fails (is inefficient) in relation to externalities, the call for the state to act as a corrective to market failure is justified.
Didactic Principles
- Market
- Governmental regulatory framework
- Businesses & Associations
- Economic citizens
- The public and NGOs