ABSTRACT
In the history of economic policy the particular role that the state should play has been anchored in two rival notions of the market. Traditionally, the role of the state in the economy was rationalized on the putative existence of pervasive market failure which was, in part, determined by the presence of monopolistic or oligopolistic markets (Stern et al. 2005). For example, new trade theory (Krugman 1990), which invoked the need for strategic policies to improve domestic trade performance (Krugman 1986), is based on monopolistic or oligopolistic firms. On the other hand, authors who supported a minimal role for state involvement proposed laissez faire to eliminate market failure, thereby undercutting a key rationale for state intervention (Bhagwati 1999). The key to the achievement of successful market reform policies, in the laissez-faire view, is thus the reinstatement of perfect competition.
