An Economic Theory, Second Edition
Chapter 7: Internal and External Markets
7. Internal and external markets 7.1 INTRODUCTION The previous chapter discussed, amongst other things, the methods available to an entrepreneur for reducing his market-making costs. The focus was on methods of improving the organization of trade within a particular market. This chapter analyses a quite different approach to the reduction of marketmaking costs. The focus is on achieving a reduction of market-making costs within the economy as a whole through a reduction in the number of markets that operate. Because of the ﬁxed costs incurred in making a market, conducting a roughly similar volume of trade through fewer markets reduces aggregate market-making costs. But how exactly is the number of markets reduced? And what are the criteria which determine which markets should be eliminated and which preserved? The basic strategy is to absorb several different markets into a single market by devising a single composite good (or property right) to replace several distinct goods (or property rights) which would otherwise be traded separately. The principles underlying this approach are examined in Section 7.2 below. Efﬁciency demands that it should be relatively easy to make a market in the composite good. Ceteris paribus, goods which have low marketmaking costs should be chosen as composite goods, and the goods displaced should be those with high market-making costs. The economic forces which induce this result are examined in Section 7.3. But what is the effect of the disappearance of some particular market on the freedom of the individual to allocate resources in...
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