ABSTRACT
This chapter shifts the focus of the discussion to use the framework developed in Part I to analyse the rationale for public sector activity and in particular, interaction with private sector firms. Economists, working within a liberal tradition, would in general terms agree with the guidelines developed by Adam Smith (1910:180–1) that define the responsibilities of a ‘sovereign’:
The sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society. According to the system of natural liberty, the sovereign has only three duties to attend to…: first, the duty of protecting the society from the violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and thirdly, the duty of erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals, to erect and maintain.
