Market Failures and How to Correct Them

Kevin Cox
3 min readApr 1, 2024

Have you ever wondered why rich countries get richer but less productive each year, why ten people possess as much wealth as the poorest half of the world’s population, why the price of houses keeps increasing faster than inflation and why central banks target a 2% to 3% range of inflation?

The first reason is that governments allow banks to create new money to transfer ownership rather than create new assets. Loans to transfer existing assets should use existing money, while new money should fund new assets.

Another reason is the manipulation of rules and regulations by large organisations and very wealthy people to pay little tax and to move profits from those who produce and pay for goods and services to those who own productive assets.

Economists believe free markets control prices through competition. The sad truth is that so-called free markets are not free, and increasingly, markets are oligopolies and monophonic. Governments attempt to correct the problem by taxing profits. However, paying taxes by the rich has become optional as an army of accountants and lawyers find ways to work the rules and regulations to reduce taxes.

Another factor is price hysteresis. It is easier to put prices up and harder to take them down. When a government uses interest rates to control the money supply, asset prices will go up and stay up and not decrease when interest rates drop. Governments should not use interest rates to control the money supply. Rather, they should reduce the share of interest banks retain on riskier loans. If banks charge higher interest but include some interest paid to reduce the amount owed, the loan is repaid more rapidly, reducing the risk. Higher interest rates increase risk, while speedier repayment reduces the risk more than the increase caused by the risk, as outlined in this short article How Community Banks Can Outcompete the Big Four Banks.

Price Setting in Monopolies

Markets allow buyers and sellers choices. The buyers have a choice to buy from, and the sellers have a choice on who to sell to.

What if, instead, we had a system where a buyer, after a purchase, becomes a seller? If many people move from buyers to sellers at different stages, the system becomes self-regulating and sets a fair price production cost plus an agreed profit. This establishes a self-regulating system without a market to set prices. Instead, the profit is shared between buyers and sellers, with buyers receiving their share from future sales.

Today, sellers keep all the profits through ownership of the assets. The challenge is giving buyers a share of future ownership and the profits from that future ownership.

For housing, it is relatively simple. The future profit comes from future rent, so the seller and the buyer jointly own the house by owning shares. Buyers pay rent where 50% of the rent purchases shares in the house. This reduces the cost of a home by removing the interest cost on loans. Typically, the cost of interest is the same as the cost of the loan. These and other savings reduce the cost of a loan by half, making housing affordable while keeping the price the same.

For companies, half the profit on a sale purchases shares from existing shareholders. Buyer shareholders will want to keep prices down, and seller shareholders will want the prices to go up. The system self-regulates and keeps the prices fair without the market setting prices.

Having a few companies sharing future profits will establish fair prices and control the prices in any free market. It stimulates competition for cheaper ways to produce the same goods and services instead of today’s drive for higher and higher prices to increase profits for the same goods.

See more at Permanent Home Markets Transcript and Increasing Productivity with an Efficient Financial System.

Fitting Permanent Markets into the Existing Economy

The approach does not require new government rules and regulations, as permanent markets are just another company and will compete with other companies in the free market, allowing the best approach to win. The market failures of a mal-distribution of wealth, increased inflation, price hysteresis, and the negative effects of market concentration of buyers and sellers are reduced.

A solution to market failure and the gross disparity of wealth in societies is to have some companies or cooperatives to set fair prices by including the sale of shares or other assets with the payments for products and services.

Today, we allow market failures to occur and then try to correct the problems. Tomorrow, we will stop most market failures from occurring and save the cost of correction.



Kevin Cox

Kevin works on empowering individuals within local communities to rid the economy of unearned income.