A ‘free market’ is an idealized mechnism wherein buyers and sellers come together to buy a sell a good or service, with little or no external control or regulation. For example, if you want to buy a cup of coffee in the United States, you, the buyer can simply go buy it at any seller, pay whatever a given coffee shop is charging, assuming you like the cost, and buy a cup of coffee. The price of a cup of coffee is not set by the government. On the other hand, the market for purchasing petrol/gasoline for your automobile in India is not a free market because the price per liter is set by the goverment of India.

In this post, I am going to collect instances of market failures, where a free market was set up but the outcomes are very different from those inteded byt he free makrket framework.

  1. Hospitals in rural areas: not economically profitable for healthcare companies to set up hospitals in poorer rural areas. For that matter the same is true for groceries, leading to ‘grocery deserts’ in parts of rural US.

  2. Tacit duopoly in the US dialasis industry: the free market has led to massive consolidations via M&A in the dialysis industry, leaving only two players - this obviously impacts prices and consumer choice. Pharmaceuticals and Rare Diseases: The market for drugs treating rare diseases often fails because the potential customer base is too small to justify the high costs of research and development. This leads to a lack of available treatments for such conditions, known as “orphan diseases,” unless government incentives or subsidies are provided.

  3. Environmental Damage: In a free market, companies may not internalize the cost of environmental damage they cause (externalities). This can lead to over-pollution, as the cost of damage is not reflected in the price of goods or services. Classic examples include air pollution from factories and water pollution from agricultural runoff.

  4. Education in Low-Income Areas: The market might fail to provide adequate educational services in economically disadvantaged areas because potential providers may not find it profitable to operate in these regions. This leads to educational deserts, similar to grocery deserts, where quality education is scarce or unaffordable.

  5. Public Transportation: In many regions, especially rural and less densely populated areas, it’s not profitable for private companies to operate public transportation. This can result in inadequate or nonexistent public transit options, which impacts mobility and economic opportunities for residents.

  6. Financial Markets and Information Asymmetry: Markets can fail when there is a significant asymmetry in information between buyers and sellers. An example is the subprime mortgage crisis, where the complexity and opacity of mortgage-backed securities contributed to a disastrous economic collapse. Sellers had more information about the risks than buyers, leading to poor decision-making by the latter.

  7. High-Speed Internet Access: Similar to hospitals and groceries, market forces alone often fail to extend high-speed internet access to rural or economically less attractive areas. This creates a digital divide, impacting education, business opportunities, and access to services.