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Discuss the view that the free market economy encourages negative externalities and thus the size of the public sector should be increased.
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Discuss the view that the free market economy encourages negative externalities and thus the size of the public sector should be increased. "Almost everything we do has some third-party effects, however small and however remote" said Milton Friedman. External effects have been studied by economists ever since the days of Marshall and Pigou. Often, the existence of externalities has been cited as one of the reasons why markets fail. Because of the existence of externalities, it is claimed that the market will fail to achieve a Pareto optimal allocation of resources and that the government must intervene and use taxes, subsidies, restrictions, quotas, etc to remedy the situation. However, it is spurious to claim that the problem of externalities is a result of the free market economy. The failure is not in the market but in the failure to clearly define and enforce property rights and the problem of negative externalities...
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