Welcome to Econ Talk, part of the Library of Economics and Liberty. I'm your host Russ Roberts

of George Mason University and Stanford University's Hoover Institution. Our website is econtalk.org

where you can subscribe, find other episodes, comment on this podcast, and find links to

another information related to today's conversation. Our email address is mailadicontalk.org. We'd

love to hear from you. My guest today is my colleague here at George Mason University,

Don Boudreau. Don is the chair of the economics department, and we blog together at Cafe

Hayek. Don, welcome back to Econ Talk. Good to be here. Don, I want to talk about an issue raised

by one of our listeners who wrote in an email, how do you distinguish when the government

or the market is the more appropriate route for fixing a problem? I want to talk about the

standard economic mainstream approach to this question and what I think is missing in

that analysis. And if we have time, I'd like to turn to some applications in particular

policy areas. The standard mainstream answer to the question of what is appropriate for

government and what's appropriate to the market usually is treated as one of looking for

what's called market failure. So the standard view is that, well, as long as markets are

competitive and people have information and there are no externalities, and we'll talk about

what that is in a minute, then people pursuing their own self interest buyers and sellers

will produce an outcome that has a lot of attractive features. Adam Smith wrote about

it in his invisible hand. The area of what's called welfare economics looks at the properties

of the choices that people make under those situations. The general consensus in economics

is as long as there aren't some of these problems, externalities, what are called public goods,

imperfect information, as long as there isn't monopoly, then everything's going to turn

out fine. But of course, that leads to the conclusion that if any of those things do exist,

...