Externalities and government

Abstract

In Whither socialism Stiglitz (1994) argues market equilibria with imperfect or incomplete information are generally not constrained pareto efficient.' A government subject to the same informational limitations can achieve better outcomes. In this he is, of course, following the conventional wisdom. For him this is the central proposition that establishes the merit of policy activism. Of course, this is not perfectly true, but he at least says it can achieve better outcomes, not that it will. There are two problems here. The first and least important is that he is implicitly assuming a set of motives which are not exactly likely. He is assuming that the market participants are solely engaged in maximizing their own utility, and the government officials are trying to do good. We can invert this and assume that the government officials are trying to maximize their own utility, and the market participants, perhaps under the influence of St. Thomas, are attempting to do good. Under these circumstances, the government would not achieve Pareto efficiency, and the market could do better, although once again it is not obvious that it would. Of course, the incentives implicitly assumed here are not very realistic. Both the participants in the market, and the participants in the government are primarily interested in their own and their families well-being, but both of them to some extent are willing to sacrifice to help the poor and downtrodden, carry out moral duties, etc. From my own experience, I would say that perhaps the government officials are less interested in helping others than the private business men. This may come from the fact that it is easier for a government official to conceal, even from himself his private interests, than it is for business men. Of course, my perspective may be biased. My initiation into government was