ECONOMISTS AND MARKETS

Economists have always been concerned with markets. For the most part, they have been concerned with how markets operated – whether they were competitive or monopolistic and whether they needed to be regulated. There might even be products (such as one where technology meant that monopoly would emerge naturally or where it might be wasteful to have more than one supplier) that could better be provided by the state than through markets. However, it was generally accepted that some goods could be bought and sold in markets but others could not. Thus, whilst there could be markets for rice, motor vehicles, fuel or water, it was not possible to have a market for ‘goods’ such as clean air. Government provision and regulation were required to achieve social objectives.

In the closing decades of the twentieth century economists began to challenge this consensus: they have, to use a phrase cited in Chapter 1, reinvented the bazaar. A literature developed on the operation of government and bureaucracies that pointed out that governments, as well as markets, could fail. Critics of government action were able to point to many examples where government allocation of resources appeared to be highly inefficient. In response, economists argued for extending the scope of markets. Here, we consider two examples, first, the creation of markets in the United States to combat the problem of acid rain caused by sulphur dioxide emissions, and second, the creation of a market for the part of the radio frequency spectrum set aside for third-generation (3G) mobile phone networks.