Society, Markets and Rules
Chapter 5: Government failure
The way in which economists have looked at the state and its effects on the economy has fluctuated substantially over time (Medema 2003). In contrast to what the first substantial article in the first constitution of the American Economic Association holds, governments are now largely seen as affecting the workings of an economy negatively if and when they do more than what a ‘night-watch state’ would. Nowadays, economists tend to see the market as a default option for social order and a role for government only when markets fail. Markets are typically believed to fail under circumstances of (excessive) externalities that are either positive or negative, in cases when public goods are traded, in cases of increasing returns or a natural monopoly creating market imperfections, or, possibly, according to some, to correct unequal distribution of wealth or income. Some economists, such as social and institutional economists, have been more amenable to a role for government in the economy. Its role, when explicitly investigated, is sometimes seen as benevolent in principle. In addition, institutional economics recognizes that markets cannot function if not embedded in a broader set of interrelated institutions.
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