“Imperfections in the Economics of Public Policy,” N. Stern (2009)

Nicholas Stern, lead author of the British Government Stern Report on Climate Change, discusses the role of public policy among economists in this lecture. He rightly notes that public economics, particularly welfare issues when there are market imperfections, is less studied by economists today than in his generation. He argues that because of this trend, young economists are poorly equipped to deal with issues such as climate change, and that they default to the view that “markets are efficient” and “governments are beset by incentive problems”. He argues that the result is that economists should study optimal government policy given the constraints of public choice rather than neglect government policy altogether. As an example, he focuses on reactions to the Stern Climate Change report, claiming that detractors have misunderstood basic issues of policy analysis under imperfect markets. I should add that, though interesting, his argument here does not strike me as persuasive – see the sympathetic rejoinders by Weitzman and Arrow, among others, and the less sympathetic such rejoinders by Nordhaus. More persuasive is Stern’s more general argument that modern public economics, informed by game theory and behavioral economics, among other post-1980 strains of research, still offers much ripe fruit; we may have convinced ourselves that government planning is not effective for many (most) goods, but that leaves broad swathes of the economy for which the government will continue to play a role, and therefore for which economists must comment.


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