Just to clarify, I assume that your first two test (about barriers to entry and exit) refer specifically to artificial barriers (e.g. licensing, granted monopolies, etc).  Or does this also include barriers that are naturally part of e.g. any manufacturing process?  It's hard to get into the car business, because car factories are so big and expensive.  Ditto for the chip fabrication business.

The more I think about it, the more I'm inclined to say that even "natural" barriers to entry will distort the market from its state of "perfection", even though they are unavoidable in any real world situation.  If so, then the "perfect" market not only does not exist, but never can exist, at least for any business producing non-virtual goods.

Thoughts?

Sean Casten wrote: What is an RPS, after all, if not artificial price support for a few select industries?

RPS stands for Renewable Portfolio Standard.

Are there any examples of perfect markets?

In my understanding, the big fish eat the little fish -- they have to, to survive you have to grow in a competitive market. As they get bigger, they use their power and resources to corner the market (hire lobbyists, engage in massive advertising,...).

Your intuition is right.  In terms of pure market theory, a barrier is a barrier.  Really capital-intensive stuff has an innate advantage once built.  Consider petroleum refineries, which are pretty low margin businesses (the $ is all in E&P), but once built are a big barrier against someone else coming in.

The other side of that is big dirty stuff that once permitted is a big barrier to someone else coming in.  Living in Chicago, I see all those steel mills in northern Indiana that are producing a pure commodity that in many respects is close to an ideal market.  But it's expensive to ship it around, and no one wants their town to look like Gary, IN.  Ergo, those plants have really nice barriers to entry from their competition, who can't build the facility (even if they had the $) until some town decides that they really want them.

And you're absolutely right that perfection never really exists (although all economic models assume it does, since to admit it doesn't exist is to admit that you can't model reality - subject for another post someday).  But that's not to say that  regulation can't recognize that and react accordingly - for example, by providing bridges to get over the barriers to entry.  More often, regulation takes the opposite tack, raising barriers to entry, as when it extends the life of patents & trademarks or guarantees equity returns of the existing market participants.

I see this as "game theory" in this pro-bidness or pro-government would both fail as opposites ... unless they worked together.

Onward through the fog

Sean, could you clarify something for me?  Your third "basic test" for a market is price transparency "(e.g. prices reflect costs)."

Don't prices in a market reflect supply and demand, rather than costs?  

As I was taught, the third bullet should be more along the lines of "information transparency, as reflected by prices."  That is to say that there should be few, if any, barriers to obtaining the prices, and the information about the market that is conveyed by those prices.

Yes - sort of.  My wording is somewhat sloppy, and I take your point.  But there is an issue of cost transparency as well, as follows: if costs change, prices should respond.  

Compare this to the coal industry, where the majority of the costs are related to health impacts, none of which show up in the price of power.  So when those costs rise, we see no differential reason to shift resources elsewhere.

This is not incompatible with saying that the relate through supply and demand (since if we paid the health costs for coal in our coal-derived kWh, we'd demand a lot less coal power), but not quite the same thing because it factors in all the costs that are treated external to the system.  (And lest someone cry that these externalities are non-monetizeable, I would point out that we make all sorts of decisions about incorporating those externalities into new plants that compete with coal - like all the audits of potential bat fatalities that would accompany a new wind farm - all while assuming that the alternative has no costs that are not already reflected in the price.)

Based on your previous comment, wouldn't another way to state #3 be "no externalized costs"?