system
Given the following post, respond as if you're commenting on Reddit:
human
In economic terms, what are the benefits and drawbacks of the profit motive?

I don't know if this is the question I want to ask, but I'm gonna roll with it and try to explain what I'm getting at.

In the modern economy, for the most part, the goal of any business is to generate a profit. Some care about profit maximization more than others. My perception is that, at least in some industries, profit maximization has led to negative effects on the consumer/society. News organizations prioritize sensationalism and spin because it gets them more clicks or views. Tech companies have been making their products with planned obsolescence in mind and making them near-impossible to repair, leading to an increase in electronic waste and forcing customers to buy new products cyclically, because that makes more profit than building a product that will last. Fast fashion companies churn out disposable clothing produced in sweatshops with no regard for their impact on the environment because, again, it's more profitable.

I can accept that regulation is necessary to curb these negative effects. And I don't have a problem with profit as a general rule; if a bakery makes a cake with $0.25 worth of ingredients and sells it for $5, I don't think that's necessarily a bad or immoral thing. However, I hesitate to "endorse" profit because it's clear that profit maximization can be detrimental to society in at least some important circumstances.

Rather than get into a moral or ethical debate about whether profit is "good" or "bad," I want to know what economists generally think of it. Does the profit motive lead to a more efficient allocation of resources, on-balance? In what contexts does it work? When is it inappropriate? What function does it serve in the economy? Are the examples I listed profit maximization or something else? Am I missing something important here?
gpt
First, the benefits of the profit motive: When firms are profit maximizing in competitive markets, and markets are complete, then goods are allocated efficiently.  Formally, this is the first welfare theorem, and if you're interested in the details you can find proofs online or in a textbook (e.g. Mas-Colell).  Informally, this is Adam Smith's Invisible Hand.  The profit motive induces firms to produce goods that are desired, and produce them at low cost.

What are the drawbacks?  In reality the assumptions of the first welfare theorem do not hold.  You have identified several problems which violate the "markets are complete" assumption.  If there are externalities without associated property rights, then firms will not internalize all the costs of their activities.  Over-pollution (in some forms) is a classic case of this problem.  Usually this problem would lead profit-maximizing firms to produce too much, although if there are positive externalities they might produce too little.

The second assumption is perfect competition.  If profit-maximizing firms have market power and can affect the price of their goods, then they will tend to produce too little of the good.

In summary, the profit motive brings the economy close to efficiency when markets work well, but can lead to over- or under-production when market power or externalities (or other problems of market incompleteness) are large.  

I hope I've answered your question.  Here are a couple more to think about.  Clearly, some markets are incomplete and some firms have market power, so the first welfare theorem does not literally hold.  How can we solve some of the problems?  Governments sometimes use regulation to do this: anti-trust laws constrain market power in some cases, and environmental regulation prevents some problems with externalities.  Are there other options?  If you are interested in these sorts of questions, measuring and solving these problems is one of the main jobs of IO economists.