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. Adam Smith’s principle of laissezfaire states that government should allow private markets to operate with a free hand. However, Adam Smith allowed for three fundamental roles for government in a free market economy. In simple terms, the fundamental roles of government include national defense, an impartial system of laws, and a set of public works and institutions.
