The Economic Role of Government

Abstract

Much of economic theory of the textbook variety is a celebration of the free market system. This celebration has two parts. First, the operation of the price system, in the context of competitive markets, leads to a balance between the demand and supply of the different goods and services traded. In other words, flexible prices results in competitive market clearing. Second, the market-clearing equilibrium – brought about through flexible prices and competitive markets – is a ‘good thing’ in the sense that it is also a point of economic efficiency.¹ In other words, competitive outcomes are also efficient ones.²