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Markets or Governments: Choosing Between Imperfect Alternatives.

Markets or Governments: Choosing Between Imperfect Alternatives

HAVE YOU BEEN looking for a book that gives a complete but nontechnical discussion of the economic role of both markets and government in our economy? This small but balanced hardcover book by Charles Wolf, Jr., could be the one you need.

The book, part of a RAND Corporation Research Study, also has the support of the Sloan Foundation. It is written for the reader who reads business journals, although economists will especially appreciate how Wolf collects, sifts through and collates ideas on the appropriate role of markets and government in our economy. The author uses an eclectic and inductive combination of anecdotes, data and experience, on the one hand, and generalization and theory on the other hand.

Wolf begins Chapter 1 by invoking the contrast between a TV film series by John Kenneth Galbraith and one by Milton Friedman. He notes an asymmetry in the analysis of markets and government. A formal theory of market failure exists, but no comparable formal theory of nonmarket (government) failure is available. The goal of the book is to develop a theory of nonmarket failure. The author also discusses the problems associated with attempts to use government to correct for market failure.

Chapter 2 on market failure presents the inadequacies of markets. Wolf first discusses externalities and public goods. He notes that Coase contends that externalities do not necessarily lead to market failure but serious problems arise in carrying out Coase's ideas. Where increasing returns exist, he mentions direct operation or regulation of a "natural" monopoly and antitrust legislation. He suggests that a rationale for government intervention exists when price, information, and mobility characteristics of "perfect" markets depart significantly from those in actual markets. He acknowledges that where a trade-off occurs between efficiency and equity, social consensus in democratic systems requires forgoing some of the one to realize more of the other.

Chapter 3 discusses the demand and supply characteristics for nonmarket intervention to bring about more equitable or more efficient outcomes. Some of the demand conditions include increased public awareness of market shortcomings. The organization and political enfranchisement of many groups and interests have increased that formerly were less informed and less active in the political process. Rewards often accrue to legislators and governmental officials who articulate and publicize problems and legislate proposed solutions, without assuming responsibility for implementing them.

The conditions of nonmarket supply involve a difficulty in defining and measuring output. Nonmarket outputs in government are usually produced by a single agency whose "monopoly" in a particular field is legislatively mandated, administratively accepted, or both. Finally, the technology of producing nonmarket outputs is often either unknown, or, if known, associated with considerable uncertainty and ambiguity.

Chapter 4 lists four sources and types of nonmarket failure. The failures are likely to arise regardless of the point at which the market establishes an equilibrium between nonmarket demand and supply. First, nonmarkets remove the link between the costs of producing or conducting an activity and the income that sustains it. Second, public agencies lack the direct-performance indicators available to market organizations from consumer behavior, market shares, and the profit-and-loss bottom line. Third, derived externalities exist in the form of unanticipated side effects of nonmarket activities. Finally, nonmarket activities may themselves generate distributional inequities rather than remedy them.

Chapter 5 digresses to explain how the theory of nonmarket failure can provide a useful supplement to the standard methods associated with policy analysis.

Chapter 6 begins the general considerations in comparing market and nonmarket alternatives. Wolf concludes that markets do a better job than governments. They are more efficient according to both static and dynamic criteria. However, both markets and governments have strengths and weaknesses about equity and other nonefficiency considerations.

Chapter 7 discusses the empirical aspects of comparing market and non-market alternatives. Wolf concludes that for both microeconomic and macroeconomic efficiency the empirical evidences supports the charge that markets do a better job than governments.

In the final chapter Wolf says the choice between markets and governments is complex. It is not a pure choice between markets or governments, but a choice between combinations of the two. Governments can play an important role in improving and extending the functioning of markets. Conversely, markets can play an important role in improving the functioning of government.
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Author:Margolis, Marvin S.
Publication:Business Economics
Article Type:Book Review
Date:Jul 1, 1989
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