ABSTRACT
The economics of international defence associations between a relatively small number of countries has become a growth area in the application of economic analysis, particularly the theory of public goods. This chapter shows how the economic analysis might be extended and also how it can be used to explain some of the recent problems encountered in the continued existence of the North Atlantic Treaty Organization (NATO) Alliance. It considers the international trade problems which have arisen as a result of attempts to improve the efficiency of defence expenditure. Defence is usually given as the classic example of a public good. A military alliance such as NATO can be viewed as providing a public good in the form of collective defence. Economic theory which assumes that a small group of nations will combine to exploit efficiently the benefits of collective action is limited in that it neglects the political market.
