Free Markets Need Rules?

It may seem to be a contradiction to describe something as free when it is bound by rules.  That is the case with free markets.  They exist only when specific rules are obeyed.  The banning of anti-competitive behavior exemplifies those rules.  When those rules are broken a free market becomes something else.

When left to their own devices, free markets self destruct. To understand why, focus your attention on how resources are redistributed in free markets.  Then a way to save free markets from themselves can be conceived.

Successful free market participants are rewarded with more resources than their competitors for their efforts.  (A buyer gets something that another buyer can not afford to buy.  And a seller makes a sale instead of another seller.)  The most successful competitors get extra resources.  Ideally these extra resources are used to increase supplies of whatever they offer.  This is supposed to happen until the price of these supplies become too low for less efficient competitors to stay in business.  This can conceivably lead to a monopoly.

That situation would be ideal if it does not afford the winner an opportunity to change the market’s rules and artificially inflate their advantage.  A monopoly’s, (or cartel’s), influence over the market’s rules is proportional to their share of the market.  The rules inevitably are changed to favor established sellers and become anti-competitive.  That violates free market rules.  A manipulated market is not free.

Free markets are worth preserving.  They bring as many sellers together with as many consumers as practicably possible.  Free markets most dependably give consumers what they demand until rules that protect established sellers happens.  Then the free market is subverted and becomes something else.  Rules defining free markets also need to help preserve them.

It is too bad that what makes free markets so desirable also gives successful participants an incentive to become domineering.  An equally impartial dis-incentive is needed for balance.  It is obvious that this dis-incentive needs to punish participants that begin to dominate a free market.

A free market rule that imposes a progressive tax on the value of market share can provide a plain and impartial method to preserve the market’s competition and innovation.  It can also provide an equitable source of government funding.  The tax could be scaled so that it diminishes the incentive of established market participants to gain market share until they have around 33% of market share.  Then that incentive can be completely canceled out.

The target of 33% can be optimized to maximize tax revenue.  Potential revenue for this kind of tax is only limited by the health and growth of the market.  That gives regulators a strong incentive to do what is really best for the market.

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