The Market Failure Argument is a commonly used justification for government regulation of the free market. It states that the market is incapable of protecting third parties from damages produced by certain negative externalities, and that only central legislation can cover this need.

In this lecture, John Hasnas reveals a compelling alternative to this view, by re-defining the relationship between law and market as often considered by economists. Hasnas emphasizes the importance of understanding the existence of three types of law. Legislation is composed of general rules created by legislators, that apply to all individuals. Customary and common law however, are norms that have evolved to serve human needs, in order to discourage unwanted behavior, while maintaining the largest possible amount of individual freedom. This type of common law-regulation exists in the realm of voluntary market transactions. Market and law are not truly separate.

In reality, the ideal of the free market isn’t completely unregulated. While it is free of government regulation, it is still regulated by ethical beliefs, customary practices, and by civil liability. The market’s endogenous regulatory mechanism accounts for negative externalities quite effectively. All this considered, is The Market Failure Argument truly valid? Hasnas concludes as follows: Before defending statutory government regulation of the market, it is important to find those few, if any, externalities that the market really cannot cover using it’s own internal regulatory systems.