Libertarians don't posit a precise optimum. They are generally of the opinion that the optimum is quite a bit lower than what we have right now.
> Don't libertarians understand or accept that there are market failures that government is needed to solve?
The only credible "failure" I'm aware of is the need to internalize of public externalities, which can be achieved in a number of liberty-friendly ways. See, for example, the Coase theorem.
Libertarians recognize that these models are not exact, but they do suggest that we can do better.
Perhaps you could list some of the market failures you are thinking of?
Which only holds when transaction costs are negligible, i.e., never. Which was precisely Coase's point in that work - he showed that mathematically, it doesn't matter what initial distribution you put on something (his example was radio broadcast frequency allocations), since the final Pareto-optimal distribution is independent of initial conditions. This is the Coase theorem. But as soon as you include transaction costs, the theorem fails to hold, and initial distribution is important.
A few obvious market failures:
* Microsoft monopoly in the late 90s
* Too little being done to reduce CO2 emissions, since emission costs are externalized and delayed
* Broadband providers in the US
* EpiPen pricing
* Essentially every Health and Safety regulation ever exists to fix a market failure. In the small government world, employers see no cost of workers dying of lung cancer in their 60s from breathing asbestos, etc.
MS had better products than everyone else. It was a market success.
> * Too little being done to reduce CO2 emissions, since emission costs are externalized and delayed
This is within a libertarian government's purview. Negative externalities should be regulated since it's protection of citizens.
> * Broadband providers in the US
Government authorized duopolies / monopolies, not a market failure.
> * EpiPen pricing
Result of current laws, not a market failure.
> * Essentially every Health and Safety regulation ever exists to fix a market failure. In the small government world, employers see no cost of workers dying of lung cancer in their 60s from breathing asbestos, etc.
Companies have an incentive to avoid harming their workers. It has a significant negative impact on their reputation and workers could seek civil damages.
I'm not a libertarian and agree with you on all points except...
> * EpiPen pricing
My understanding was that part of the problem with the EpiPen was a monopoly due to patent issues. Patents are monopolies created by the government, so the market failures they cause are in fact government failures.
I agree. But the flipside is that without patents, no-one would be spending money on drug development, since there would be 100% probability that someone straight-up copies your drug that you spent 5 years and $50 million to develop, and can then sell profitably at a lower price and capture the market.
I think we can all agree that drug patents in particular are a necessary evil. On other patents (in particular software) I'm a lot more skeptical. And that's not to say "Big Pharma" isn't trying to abuse the system to maximise their profits.
Necessary evil: yes, to some extent. I didn't say "get rid of all patents", just that they can cause market failures.
I could imagine some models to make them less evil, for example by having a scheme that forces companies to grant fairly priced licenses to their competitors. Or, for drugs whose availability is in society's general interest, a government reimbursing the development costs. For both of these one would need a fair way of determining development costs, but as far as I understand pharma research already has a detailed paper trail to make sure their patent applications are bullet-proof.
> Which only holds when transaction costs are negligible,
That's why I said these models are not exact. They still work ok; instead of being Pareto optimal we're epsilon-Pareto optimal. With some form of small government managing large-scale many-party contracts, we can bring the overhead of Coase-style externality management down very low.
> Too little being done to reduce CO2 emissions,
Again, via Coase, we could find an approximately correct internalization incentive via increasing the purview of trespass law. Polluting would involve the purchase of easement rights. This would be very hard to organize with no government, but feasible with a small government.
> Microsoft monopoly in the late 90s
The government didn't solve this problem, they contributed to it. One of the reasons MS got so huge was federal procurement contracts. The MS monopoly got busted up because other companies (namely Apple) started making better computers, and now we also have Google and Linux in the fold in a major way.
> Broadband providers in the US
This is the fault of regional government line leasing rules, which prevent competition by only allowing one company (maybe 2) to service a building at a time. If the government were behaving optimally, either from a social good or profit-making perspective, we would have more ISPs per building in most places, leading to actual competition.
> Essentially every Health and Safety regulation ever exists to fix a market failure. In the small government world, employers see no cost of workers dying of lung cancer in their 60s from breathing asbestos, etc.
This was fixed because of legislative pressure by labor unions, not out of the charity of the government. If the government decided they weren't responsible for this, unions would just have taken a different approach. Probably just some sort of insurance contract internalizing the risk of contracting a work-related injury or illness.
> I could go on.
Please do; nothing you've said so far has been very compelling.
To me, probably the most important market failures rise from information asymmetries. Not only the textbook cases where you know something I don't, but would understand if you told that to me (lemon markets for cars), but the ones where I am so dumb compared to you that even if you tried to explain me, I would not understand (monty hall problem as an extremely simple example). Even further, the issues where you manipulate me to want things that are bad for me, are a kind of information asymmetry.
The problem is that the latter concepts do not seem to enter mainstream economics or libertarian mindset. People (including me) are manipulable and stupid. And having no control how much stupid people are going to be manipulated for benefit of others, would end up very bad very fast.
Besides externalized costs, which is gigantic issue that is not easy to solve. These problems are also clear market failures:
Large scale goals with large public benefits but which come at high costs will not be achieved without high level cooperation. For every individual market participant, the public education system, the public highway system, the public energy system, etc. have costs far exceeding their means. Yet every market participant benefits enough that they are happy they exist. The level of cooperation needed requires organization at the scale of at least local government.
Dealing with external factors, such as other nations -especially if they're hostile- or natural threats. Individual market participants can not muster armies (unless they are at the scale of governments), cant bargain with foreign governments on equal terms and will not provide (preventive) care for disasters/diseasese/etc. Would microsoft or walmart vaccinate everyone?
I had a longer response written out, but my phone browser crashed and I have to go soon. This will be brief.
> externalized costs
Coase theorem and strong trespass law.
> Large scale goals with large public benefits but which come at high costs
Assurance contracts.
> public education system,
Private schools perform better across the board. If public schools didn't exist, I would expect to see more parochial and charity schools.
> public highway system
Replacing the IH system with privately operated toll roads is well within the reach of US investment banks, and it would be a safe bet. Plus they would be incentivized to actually do repairs quickly, unlike on public roads. Wins all around!
> public energy system,
Sure, this is a hard good to privatize due to line easement requirements. There are ways around this, but I think practically libertarians would agree with the government managing things like water pipes or electrical lines. This will become less of an issue in the near future as being off-grid on solar becomes practical for more people. (Or if we end up with small-scale community nuclear, like some are working towards.)
> Yet every market participant benefits enough that they are happy they exist.
If you think they'll still be happy after being made aware of how much they're paying (instead of it being obfuscated via taxes and respending) then there's no problem.
> armies
PMCs and military insurance. This would almost certainly be more efficient than the current bloated military we have in the US.
> disasters/disease
Insurance again.
> Would microsoft or walmart vaccinate everyone?
Does the government vaccinate everyone now? (No, they do not.)
> Don't libertarians understand or accept that there are market failures that government is needed to solve?
The only credible "failure" I'm aware of is the need to internalize of public externalities, which can be achieved in a number of liberty-friendly ways. See, for example, the Coase theorem.
Libertarians recognize that these models are not exact, but they do suggest that we can do better.
Perhaps you could list some of the market failures you are thinking of?