Some of the strongest economic arguments for government intervention are based on the calculation of so-called social prices. These social prices may also be referred to as social costs, social benefits, or, less properly, external costs and external benefits. The problem is that these social costs are miscalculated works of fiction and in reality market prices already are the optimal social prices.
Here are several reasons that optimal social prices are no different than market prices:
- There is no factor which can shift social prices which doesn’t already affect market prices. This means that all social accounting for things like increase or decreased preference is a double counting.
- Externalities are already priced into the market, and free riders are simply another kind of externality. Read about the Coase Theorem here.
- All arguments for market failure fail, and the term is misleading. Referring to a market which has a market failure as an imperfect market would be far more accurate.
- If an actual market performs at 99% of the capacity of its theoretical counterpart it is referred to as a market failure, but this is not failure at all in the usual sense. If the alternative is government intervention and the government failure is worse than the market failure, there is no real market failure in the common sense.
- Social prices are determined through bodies which undergo a strict reduction in information relative to the market. These restricted bodies incur a kind of economic calculation problem, and they also incur subjective bias. These groups are the actors committing a calculation error, not the market. It’s also important to note that the market works by revealed preference, while these other groups often employ surveys and so on, incurring a further source of error which is the preference revelation problem.