The economic crisis beginning in 2008 illustrates that free markets do not always produce optimal outcomes. There are four fundamental flaws with the assumption that private greed expressed through free markets creates social good. First, Pareto optimality is an excessively narrow definition of social goals. Second, market outcomes are efficient only if everything that matters is a marketable commodity with a meaningful price. Third, businesses are often large enough to wield significant market power. And lastly, perfect information is not a valid assumption. The economic crisis also illustrates the importance of setting aside reserves to buffer against downturns and rare events. The paper concludes by emphasizing the important role the government should play in making long-term investments in infrastructure and energy efficiency.
