Krugman: Government Imposed Rationing Is Market Mechanism

Paul Krugman again comes out in favor of so-called "cap and trade". I'm not going to discuss his low cost estimates (Bob Murphy did an excellent job in doing that in response to a previous Krugman column) or his mischaracterization of Climategate as simply showing scientists to be "human" (as if it were a matter of honest mistakes, and not deliberate fraud) or his Keynesian argument for "climate investments" (which is really just a variation of the old broken window fallacy). What really took the price for distorting the truth was this paragraph:

"The truth is that conservatives who predict economic doom if we try to fight climate change are betraying their own principles. They claim to believe that capitalism is infinitely adaptable, that the magic of the marketplace can deal with any problem. But for some reason they insist that cap and trade — a system specifically designed to bring the power of market incentives to bear on environmental problems — can’t work."

In this short paragraph, no less than three falsehoods and contradictions can be found:

1) Conservatives (or libertarians or objectivists) do not really believe that capitalism is "infinitely adaptable" or that markets will create a perfect world. The case for the free market doesn't depend on the delusion that markets are perfect, but is instead based on the insight that it is better than the alternative of government control.

And free market advocates certainly doesn't believe that markets can undo any and all damage caused by government interventions, such as "cap and trade".

2) "Cap and trade" does not rest on market incentives since it is based on government creating an artificial shortage, something which by necessity will reduce output.

3) Incidentally, since Krugman is known to doubt "the magic of the market", shouldn't he be skeptical of the ability of the alleged market incentives here?