The limitations of markets: Background essay

Abstract

Business leaders and voting citizens as well as policy makers are influenced in their decision-making by the idea that a “perfectly free” market can produce a social optimum (a “best of all possible worlds”). Because this idea is so influential, it is important to understand the conditions that must be met for the theory to work. The theoretic prediction of the optimality of market outcomes presupposes a number of requirements, which can be grouped into three broad categories: (1) the assumption of perfectly functioning markets; (2) market-oriented patterns of motivation and behavior, on the part of both individuals and firms; and (3) the universal existence and scope of markets.optimality, market imperfections, public goods, externalities, transaction costs, market power, human needs, equity