Although Hayek believed that government intervention in markets would lead to a loss of freedom, he recognized a limited role for government to perform tasks of which free markets were not capable:
The successful use of competition as the principle of social organization precludes certain types of coercive interference with economic life, but it admits of others which sometimes may very considerably assist its work and even requires certain kinds of government action.
[32]
While Hayek is opposed to regulations that restrict the freedom to enter a trade, or to buy and sell at any price, or to control quantities, he acknowledges the utility of regulations that restrict legal methods of production, so long as these are applied equally to everyone and not used as an indirect way of controlling prices or quantities, and without forgetting the cost of such restrictions:
To prohibit the use of certain poisonous substances, or to require special precautions in their use, to limit working hours or to require certain sanitary arrangements, is fully compatible with the preservation of competition. The only question here is whether in the particular instance the advantages gained are greater than the social costs they impose.
[33]
He notes that there are certain areas, such as the environment, where activities that cause damage to third parties (known to economists as "negative
externalities") cannot effectively be regulated solely by the marketplace:
Nor can certain harmful effects of deforestation, of some methods of farming, or of the smoke and noise of factories, be confined to the owner of the property in question, or to those willing to submit to the damage for an agreed compensation.
[34]
The government also has a role in preventing fraud:
Even the most essential prerequisite of its [the market's] proper functioning, the prevention of fraud and deception (including exploitation of ignorance), provides a great and by no means fully accomplished object of legislative activity.
[35]
The government also has a role in creating a safety net:
There is no reason why, in a society which has reached the general level of wealth ours has, the first kind of security should not be guaranteed to all without endangering general freedom; that is: some minimum of food, shelter and clothing, sufficient to preserve health. Nor is there any reason why the state should not help to organize a comprehensive system of social insurance in providing for those common hazards of life against which few can make adequate provision.
[36][37]
He concludes: "In no system that could be rationally defended would the state just do nothing.
