When explained in simple terms, many aspects of capitalism and the free market appear obvious. The example of a transaction - a seller and buyer agreeing on a price that is mutually beneficial - seems fair, correct. Intervention into this transaction by another actor, such as a government, seems ridiculous and excessive. However, once all the details are accounted for, all the consequences considered, all the externalities identified, the situation grows much more complicated.
The perfect competitive free market envisioned by libertarians, and to a degree capitalists in general, is a mythological entity that simply cannot exist. Failures of the conditions for a perfect competitive free market include but are hardly limited to the following:
Buyers and sellers must know all prices and the utility they would derive from each purchase. Modern products are too complicated for the average, or even the well-informed, consumer to have perfect knowledge. Consider an automobile. Can you account for the quality of each component, down to the types of rivets, bolts, and fasteners used in the body-work alone? Not to mention understanding of the design and construction of the engine and its associated systems. This consumer, even if highly knowledgeable, must then have similar perfect knowledge when considering another product such as a smart-phone. Weighting the hardware and software choices of the designer and seller for utility against price. Not just the highly informed or educated consumer, but ALL consumers must have this perfect information to engage in a perfect market negotiation. Further, coercive advertising can warp the perception of utility gained from a purchase. Perfect information is impossible in the current modern age.
Determining what can be sold, as well as what rights are passed on to the purchaser. Often the libertarian political and economic view is held to be that of maximizing freedom. A libertarian view can often be summed up as 'minimal' or 'limited' government. There is a dangerous deception happening here. A point that is assumed and almost never considered.
The concept of private property, valued and held sacrosanct in modern capitalism as well as libertarianism, requires an incredibly powerful government, no matter how small. The only alternative to a powerful government that enforces private property rights is powerful private military and security forces that do so. This leads directly to a 'might is right' political environment where the wealthy dictate the terms of the society due to being able to afford the most 'might'. Those with less wealth, and thus less economic 'might', correspondingly have less political 'might'. A strong private army can declare ownership with no external government to contest the property seizure. Well defined property rights require a governing agency, and it must be powerful even if not 'large'.
Products must be (perfect) substitutes for each other. Again, knowing the quality and qualities of each sub component, sub system, or part of a product or service is impossible for the modern consumer to compare and contrast outside of high level, possibly misleading, information provided by the sellers. Even comparing and contrasting differing products a consumer would have difficulty balancing utility and cost as so many products and even services are 'black boxes' to the consumer, with no way of knowing the sub-components and systems and complete makeup of the product or service. Even more mythical than a working free market is the idea of homogeneous products or products where a consumer can know utility versus price.
Many products and services have massive capital barriers to entry. Some services have legislative barriers to entry (to the libertarians' credit they would do away with some of these). An individual could not create a start-up cable service, for example, without a massive source of starting capital and legislative work at both the local and state level and possibly even the federal level.
This also does not account for other 'natural monopolies' which occur in our current system.
Existing companies also have economies of scale that cannot be competed with by start-up or smaller enterprises regardless of the ability to enter the market. These economies of scale make competition while the new entrant is growing impossible. Many, if not most markets, have powerful and sometimes insurmountable barriers to entry for new entrants.
That is, no participant has the market power to set prices. This can be observed as failing in the cable television and Internet service provider markets. Prices do not reflect a price near marginal cost at all, with profits being extremely high.
This also fails in medical and health care related fields. The consumer, if requiring the product or service to live, has no ability to exert pressure to reduce the price by refusing the product or service. This allows the seller to raise the price far beyond marginal cost. In a true competitive market the price would fall to just above marginal cost. Healthcare, while not the only case, is a prime example of the failure of supply and demand pressures in pushing the price down toward marginal cost.
Purchasers only buy when they will increase their utility gained by the product or service. Humans do no always behave rationally outside of the market, suddenly expecting perfect rational behavior within the market is delusional. Mix in coercive and misleading advertising, honed by the most modern discoveries of psychology and sociology, and the average consumer cannot be thought to behave rationally at most times, certainly not at all times. Modern advertising alone makes absolutely rational purchases difficult at best and likely impossible.
Costs or benefits of a product or service do not affect third parties. This can be found false across many industries and productions. Gasoline as fuel for motor vehicles is an obvious and egregious case. The full cost of pollution is borne by all of civilization yet is not fully factored into the cost of gasoline at the pump, the cost of production, or in taxes at any stage of production, sale, or consumption. An industry that pollutes air, land, or water without adequate taxation to offset the cost of cleaning or returning the environment to a pre-use state is making profit off of externalities - the cost borne by civilization instead of the producer or even the consumer.
Economies of scale, vertical monopolies, and the like cannot simply be wished away. They exist in our current economy and would require massive regulation to reign in or eliminate. This goes against the very concept of a non-regulated market, or small government. Yet to achieve this necessity of a truly free market just such a powerful regulation agency or government would be required. As long as economies of scale are available the market will not operate in a free or truly competitive nature.
This can be also be seen in cable or satellite television providers becoming or acquiring content creation firms. Creating a market advantage competitors can only possess or match if they too purchase or create competitive subsidiaries in the same market sections. The network effect is further exaggerated when corporations are able to buy up other companies that align with their products in marketing or sales channels.
Social media companies now exploit the network effect to basically dominate the market. Creating a challenger to a Facebook or Twitter requires not only large amounts of capital but overcoming consumer fatigue and inertia as well as competing not just with the core service or product but all the ancillary services and products that the social media company now has available.
A perfect market requires some force that acts to prevent anti-competitive measures by participants. For example, a producer ignoring externalities could offer a lower price. Consumers would be required to pass on purchasing at the lower price to 'punish' the anti-competitive actor. If even a small number of consumers chose not to ignore the lower price the market would fail as more producers would move to ignore the externalities to remain competitive, creating a cycle that breaks the perfect market. Regulation, by definition, reduces the 'freedom' of the market.
As is obvious now, regulation is required to control either market failure or the degree of market failure. At minimum a legislative body, such as a government, would be required to produce regulation and have the power to enforce it. The question isn't should there be regulation but how much, and to what ends. A truly free competitive market isn't a possibility, its a myth. A dangerous and seductive one that appeals to the individualist who views government as a detriment rather than a third party actor in keeping the market functioning.
Once you accept that some regulation is required for the market to function the question has shifted from whether to have regulation to how much. Now it is a matter of degree and type, not whether they are required. Further, to create and enforce regulation you now require governing bodies or agencies. To enforce regulation they must be powerful. To cover all aspects that must be regulated it will by necessity grow in size proportional to the market(s) it regulates. The libertarian ideal begins to fade away and fall away from possible reality. To regulate large markets a powerful and well sized government is simply required.
In our civilization and in our society some freedom must be sacrificed to preserve the maximum amount of total freedoms. Such is the case in a functional competitive market. Such is always the case.