Though the interview with economist David Friedman (July 2) was an interesting read, it took some interpretation to reconcile his views to conventional economic wisdom. It is clear that Friedman is a libertarian with a difference. He advocates economic and political governance, which is less formal and more participatory for its subjects. Like most liberals, he vouches for supremacy of free markets in efficient allocation of resources. Adam Smith, the foremost proponent of free markets, had famously observed in his book Wealth of Nations that division of labour is limited to the extent of markets.
The extent of markets is unsatisfactory when it comes to provision of public goods. Our inability to segregate those who are willing to pay the price for a good and those who are not is one of the two characteristic features of any public good. The other being public good which offers itself to be jointly consumed without compromising on its quality. Because of these twin properties, free market mechanisms cannot sense their demand and supply correctly. In addition, there are many private consumption goods, which cannot be supplied by more than a single firm. The railway line from New York to Chicago is an example of such goods. In all these cases, markets do not deliver and governance must step in.
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The extent of markets is unsatisfactory when it comes to provision of public goods. Our inability to segregate those who are willing to pay the price for a good and those who are not is one of the two characteristic features of any public good. The other being public good which offers itself to be jointly consumed without compromising on its quality. Because of these twin properties, free market mechanisms cannot sense their demand and supply correctly. In addition, there are many private consumption goods, which cannot be supplied by more than a single firm. The railway line from New York to Chicago is an example of such goods. In all these cases, markets do not deliver and governance must step in.
T Syama Sundar Hyderabad
Letters can be mailed, faxed or e-mailed to:
The Editor, Business Standard
Nehru House, 4 Bahadur Shah Zafar Marg
New Delhi 110 002
Fax: (011) 23720201
E-mail: letters@bsmail.in
All letters must have a postal address and telephone number