MARKETS AND GOVERNMENT: REALIZING THE PROMISE OF GAINS FROM EXCHANGE AND COOPERATION

Year 2012, Volume: 4 Issue: 2, 287 - 295, 01.12.2012

William R. Keech Michael C. Munger Carl P. Simon

Abstract

Recent policy debates have focused on the boundary between markets and
government, as if one could partition them. The placement of this boundary has
been debated using the established theory of market failure and the developing
theory of government failure. But the questions raised by this approach are not
well-posed, and miss several important points. First, markets and governments
together can achieve and have achieved enormous success in the last two hundred
years in broadening geographical settings. Second, markets need government,
and government needs markets to enable societies to capture the gains of
cooperation and exchange. Third, we challenge the relevance of idealized
“competitive equilibrium” as the reference point against which real outcomes are
to be compared. As an alternative, we propose that the appropriate benchmark for
comparison is Pareto improvement through solving problems of collective action.
In that regard, both firms operating in markets and government agencies operating
in a statutory setting should be considered together as organizations. Viewed
from this perspective, both firms and government agencies have some shared
features and some sharply different features in their capacity for fostering
cooperation. In this paper we outline the advantages and risks of complex
organizations, and provide some general guidelines for public policymaking.

Keywords

market failure, government failure, diminishing returns, increasing returns

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