The role of the market and government

This part of the book addresses the problem of how different economic institutions – i.e. different ‘rules’ or procedures governing economic interactions among individuals – enable society to best satisfy those principles and the objectives derived from them. Limiting our discussion to the ‘constitutional’ aspects of economic institutions (setting aside consideration of current choices), we find two principal ‘rules’ of social interaction: the market and government. Obviously, other institutions may also have economic importance, such as firms and non-profit organisations other than households and government. Focusing on the market and government, we intend to direct our attention to the extreme aspects of the contrast between institutions oriented towards the pursuit of individual and collective interests, respectively. In reality, the contrast is not as sharp as it might seem. There are organisations, such as firms, that in their most abstract form also pursue private aims, or other organisations with social ends that do not share the features of government, such as voluntary non-profit groups. We address non-profit institutions only briefly (see sections 6.5 and 8.5).

This part of the book offers a preliminary examination of how and under what conditions the economic results that can be achieved through the market (intended as a specific expression of private interests) or government (intended as a particular expression of collective interests) ensure that the principles of efficiency and equity are respected.