Regulation and "market failure"

The study of economics is the study of efficiently allocating scarce resources.

If you think of economics as the study of allocating scarce resources to best achieve the various ends of humanity, you could think of economics as a soulful, rather than a dismal science.

Adam Smith, who is widely regarded as the father of economics, was, before he could even be called an “economist”, a moral philosopher. (Prior to writing The Wealth of Nations, he wrote The Theory of Moral Sentiments.)

Many economic models are based on certain assumptions which do not, by any account, resemble reality. This is often referred to as “market failure”. Understanding “market failure”, and how it impacts economic models, is fundamental to making optimal decisions both personally and on a broader scale.

While this is an area that I expect to explore in a lot of detail during the course of writing this blog, one misconception I feel compelled to point out is this: regulation is often thought of as hindering the free market and the most optimal allocation of resources. It is often perceived as a source of market failure.

This is not always the case.

Regulation can internalise externalities, one of the causes of market failure.

Regulation can prevent people from misleading and deceiving clients and customers, preventing further imperfect knowledge.

Without property rights that are recognised and enforceable, a free market will struggle to exist.

Poor regulation can cause detriment to a society. But the knee-jerk reaction I often hear lacks nuance. Good regulation can help to facilitate an efficient and effective allocation of resources, to advance humanity’s cause.

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Sonnie Bailey

Sonnie is the founder and principal of Fairhaven Wealth.

Before founding Fairhaven Wealth, Sonnie worked in the legal and financial services industries for over a decade.

Sonnie first became involved with financial advice as a specialist financial services lawyer. For many years, he was an “adviser of advisers”, reviewing thousands of advice files prepared by hundreds of financial advisers, and providing feedback in relation to the quality and appropriateness of advice; industry best practice; risk management; and regulatory compliance. He has published work in industry publications and spoken at various financial advice conferences.

Sonnie has also worked with banks, investment management firms, insurers, and derivatives providers.

Sonnie has worked as a private client lawyer, focusing on succession, estate planning and trusts. He ran his own legal firm in Australia before relocating to New Zealand. He has also acted in independent trustee and company director positions.

Sonnie is passionate about helping people achieve their goals and manage the risks to which they are exposed.

He has written extensively on his blog, New Zealand Wealth and Risk, which can be found at www.wealthandrisk.nz.

Sonnie is married to his wonderful wife Chrissy, and has two young children, Ben and Anna.