Advances in New Institutional Analysis series
Chapter 9: Government intervention and transaction management
This chapter shows, from a normative economic perspective, how the government can contribute, by linking trade and innovation policy, to reducing transaction costs and thereby achieving welfare gains. The main argument is that a major reason for government intervention is to repair market failures. Therefore, government trade and innovation policy should concentrate on knowledge spillovers in transaction management that bring about positive externalities. An example of the provision of public goods in this respect is national branding. Here, government should ensure that no damage is done to the reputation of trustworthy trading partners. By way of an example, the possible role of the government in SCM is considered. The chapter also pays ample attention to the question of whether trade and innovation policy should be targeted to specific industrial sectors. This links to the discussion of how to conduct industrial policy without invoking international retaliation. This section discusses what the modern textbooks on ‘public sector economics’ generally consider the arguments for government intervention. It should be clearly stated that this perception of what the government should and should not do stems from the welfare theory of economics, and that the tasks of government that other disciplines may consider relevant are ignored here. Moreover, this economic theory of the public sector has a strong normative character: it is the idea that government aims to maximize societal welfare that prescribes how it has to operate. Hence from this perspective the role of government is formulated in terms of what the government should do.
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