The Private and Free Market Dichotomy

By
Jensen Ahokovi
on
May 2, 2021
Category:
Economic Policy

When discussing economic policy, a common mistake made by many is conflating the free market with the private sector. Although the free market consists of private firms, not all private firms are subject to the free market. Unfortunately, this error in judgment has been a tool of demagoguery for many pro-government-intervention politicians.

First, it is essential to differentiate between “private” and “free market.” A private firm is merely a firm owned and operated by private individuals. However, a private firm may not necessarily reside in a free market. A free market denotes that economic actors act through their own volition, absent of any government intervention. If business x provides service y per market supply and demand, business x operates within a free market. If x provides service y primarily due to government subsidies, x is no longer liable to the market. Therefore, it does not operate according to the free market.

Today, the federal and state governments contract numerous private sector firms to perform government functions, particularly due to the cost-efficiency of the private sector. For example, many state governments subsidize the services of private firms to conduct garbage-collecting operations and energy distribution. On the federal level, the federal government spends billions of dollars contracting the services of private companies like Lockheed Martin to manufacture arms for the military and the Corrections Corporation of America to operate prisons.

Although private firms are more cost-efficient, the lack of a free market inhibits their potential to provide the best goods or services possible. Consider the recent “Texas Freeze.” In mid-February, an arctic wind swept across the United States, dangerously affecting Texas energy output. The cold temperatures induced a surge in the demand for electricity. However, the Texas power grid was not equipped for such a surge. With substantial sectors of the power grid shut down and unable to operate in freezing temperatures, the power grid consequently broke down, leaving millions of customers without power for days. Many have blamed the fossil fuel industries for the freeze, and subsequently the free market for the electricity breakdown.

The electrical industry in Texas, like many across the United States, is far from a legitimate free market. The Electrical Reliability Council of Texas (ERCOT) is responsible for about ninety percent of the distribution of electricity to Texans, effectively making it a government-backed monopoly with the aid of federal subsidies. According to the Texas Public Policy Foundation, over nine years from 2010 to 2019, federal subsidies for both renewables and fossil fuels constituted an estimated total of $124 billion. In economic jargon, ERCOT’s blunder comes at no surprise due to the inefficient nature of monopolies producing at the point of profit maximization (the intersection of the marginal revenue and marginal cost curves), and not the point of allocative efficiency (where the marginal cost curve intersects the demand curve).

Unfortunately, conservative politicians like Representative Dan Crenshaw (R-TX) have wrongly blamed renewable energy for the blackouts when in reality, the blame should be placed on the government subsidizing the inefficient ERCOT monopoly. For more information on the private and free market dichotomy, feel free to read this article from Capitalism.com.


Sources

Renewable Energy Booming in Texas as Oil and Gas Struggles | The Texan

ERCOT_Quick_Facts_02.4.19.pdf

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Jensen Ahokovi

Jensen is a high school senior who holds non-degree certificates in Classical Sociological Theory from the University of Amsterdam and The Philosophy of Science from the University of Pennsylvania. Outside of school, Jensen is a fellow of the YIP Institute and and an economics journalist for the Political Dropout. His scholarly work can also be read on Medium.