The Nirvana Fallacy

Blog, Environment, David Seymour

A common mistake made by critics of market mechanisms is that they do not produce perfect results. The argument can be set out as:

1) Markets produce imperfect results;
2) Governments can improve these imperfections;
Conclusion: Government action is better than private action.

The problem is that the conclusion does not follow from the premises. Market results are imperfect and government interventions can sometimes improve them, however the nirvana where all of humanity’s foibles are solved by government action does not exist for the very simple reason that governments are run by people too.

A classic example is this piece from Grist which summarises an academic paper which, in turn, argues that Coase theorem doesn’t work perfectly and therefore free market environmentalism is “deeply misguided.” Pollution markets might not be perfect, but they need to be compared to the practical reality of government intervention rather than it’s nirvana version.