The Economics of Government Market Intervention and Its International Dimension

This paper uses basic economic theory to examine the circumstances in which government intervention in markets is justified, and the conditions under which the independent domestic policy choices of national governments can potentially be unambiguously improved upon by international coordination and cooperation. In a closed economy, market intervention is justified when there are "distortions" from the perfectly competitive ideal in which all market participants fully internalize the costs and benefits of their choices and also are too small to affect the prices at which they transact. Similarly, when there are multiple countries, independent policy choices will be optimal only when the distortions being corrected are local and when the effects of the individual national policies on world prices are negligible. When both of these conditions hold, then governments should be left to their own devices in setting domestic policies, and this is true regardless of what domestic objectives these government legitimately pursue. However, when either the distortions themselves or the price effects of market intervention extend across borders, then independent policy choices will not be optimal. Whether it is possible to design a mechanism for international coordination that will improve matters, on the other hand, is open to question.