ABSTRACT
In the market, arbitrage is not only a source of profit for the powerful few, it has historically provided liquidity for corporate actions, contributed to market efficiency, and played an equalizing role through the law of one price. Arbitrage has played a different role in the public sector. In both sectors, arbitrage involves a sale and a purchase—at least nominally. But in the public sector, state and local governments borrow money (sell bonds) and then invest the proceeds (purchase financial instruments)—there is no equivalent sale and purchase of an identical financial instrument, as in the private sector. Also, in the private sector, arbitrage serves the broader community as well as those directly involved in producing it; by contrast, in the public sector, the more powerful allow arbitrage but tax it at 100% and, in the words of Chief Justice Marshall, thus destroy it.
