Section Menu

About the Speech

For an economy to perform well, there are well-recognized roles for government, both supporting basic market functioning and addressing possible shortcomings in markets. While completely competitive markets can achieve economic efficiency in the absence of externalities, markets are incomplete and some firms do not behave as price takers. The standard abstraction of a market is not as accurate a picture of many transactions as one might hope. It takes time and resources to obtain information on opportunities to buy and sell, to hire and be hired. Analyzing markets with trading frictions is an important part of analyzing the functioning of the economy. While governments can help the economy function better, they also can pursue policies that make markets function worse. The role of economic analysis in a democracy is to identify those things the government does well and those it does badly, as well as those it does not do but could to good effect. Although political debate often takes the form of more spending or less spending, more regulation or less regulation, economic analysis can help encourage more good regulations and fewer bad ones, more worthwhile spending and less wasteful spending. This presentation will review some lessons from advances in the theories of asymmetric information, incomplete markets, and market frictions.