ABSTRACT
The primary goal of this chapter is to extend our analysis of market efficiency to include an analysis of the efficiency effects of government policy. For most economists, this issue starts with the minimum role for government most famously stated by Adam Smith in the quotation above. There is wide acceptance of Smith’s principle that even in a world of very limited government there are a few essential societal functions that are best performed by the public sector. Government policies beyond these minimum functions may be justified by the efficiency losses from imperfect markets or the needs of the less fortunate based on equity concerns.
