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Externalities, markets, and government policy


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  • Roy J. Ruffin
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    Before the work of Ronald Coase, economists argued that externalities-unpriced benefits or costs-constituted the main exception to the rule that Adam Smith's invisible hand will efficiently allocate resources. Coase showed that externalities may or may not require a government solution, depending on the institutional setting of the problems and the size of transaction costs. Moreover, even in the absence of externalities, market transactions require low transaction costs. Firms exist to economize on those costs. In shifting the terms of the debate, Coase single-handedly moved economics from presuming specific roles for government action to a more neutral position requiring detailed analysis. In this article, Roy Ruffin explains Coase's contribution to understanding the role of government.

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    Article provided by Federal Reserve Bank of Dallas in its journal Economic and Financial Policy Review.

    Volume (Year): (1996)
    Issue (Month): Q III ()
    Pages: 24-29

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    Handle: RePEc:fip:fedder:y:1996:i:qiii:p:24-29

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    Keywords: Expenditures; Public;


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    1. Roy J. Ruffin, 1972. "Pollution in a Crusoe Economy," Canadian Journal of Economics, Canadian Economics Association, vol. 5(1), pages 110-18, February.
    2. Baumol, William J, 1972. "On Taxation and the Control of Externalities," American Economic Review, American Economic Association, vol. 62(3), pages 307-22, June.
    3. Manning, Richard L, 1994. "Changing Rules in Tort Law and the Market for Childhood Vaccines," Journal of Law and Economics, University of Chicago Press, vol. 37(1), pages 247-75, April.
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