While the free market economic system has proven extraordinarily successful in generating material wealth for many people, it has a number of systemic failings that need to be addressed.

The brilliance of market economics is that the market efficiently determines a price for a good based on the quantity of demand for the product and the scarcity or abundance of the supply. Prices change, reflecting changes in demand and supply. For example, during the oil crisis of the 1970s, there appeared to be a scarcity of crude oil (although, of course, the true quantity of crude oil in the world is fixed in the extremely long term). This 'scarcity' drove prices up and discouraged consumption of gasoline and oil. Higher prices also encouraged suppliers to find new oil sources and consumers to seek out more fuel-efficient technologies. The market then recognized these increases in available supply of oil and reduced demand. As a result, oil prices are lower today than they were 25 years ago (in inflation adjusted terms.)

While the market has the ability to adjust according to changes in supply and demand, it often leaves increasingly scarce environmental resources – such as clean air and water, and wild spaces for recreation or preservation of biodiversity – underpriced or altogether unpriced. For example, when a chemical company pollutes river water, it is "consuming" the cleanliness of the water. How much should it pay for that resource? The price should include the costs of river life killed by the pollution (and decreased income to fishers dependent on the river), the cost of water purification paid by downstream cities whose residents use the water for drinking and the cost to downstream farmers who use the water for irrigation. With the exception of after-the-fact penalties from lawsuits, these costs are typically not built into the market system. As a result, the chemical truly sells "below cost."

Forests provide another example. The selling price for cut logs is determined only by the cost of removing the trees. The standing forest, itself, is unvalued by the market despite the fact that it provides valuable services such as carbon absorption and recreation, not to mention habitat for entire species; and valuable products, such as sustainably harvested timber, medicinal plants and fruits. The opportunity cost of these goods and services is not calculated into the cost of cut logs and, accordingly, the wood we purchase is actually sold below cost. (In some cases, the market even assigns a negative value to the standing forest – for example when a real estate developer or agricultural company pays a logging company to cut the forest.)

This type of market failure is what economists call an "externality" because certain economic values remain external to the market's price-setting mechanism. A critical starting point for economic reform is to price externalities into the system so that when consumers and companies purchase goods, we are in fact paying full price for all the products that went into making the good. The price of a good would then include the "quality" of the air, water and soil that has gone into the product; the renewable resources – forests, sea life, etc. – that must be allowed to regenerate themselves; and, the destruction of the habitats in which a product is disposed after its useful life (e.g. landfills). When externalities are internalized, we may begin to understand the true scarcity of the natural resources that we so often take for granted. Better yet, when externalities are internalized, the market will drive us to find innovative ways to conserve and even restore those valuable resources.