Pareto efficiency: The cornerstone to her answer is the concept of Pareto efficiency. Coyle states, “An allocation of resources is Pareto efficient if nobody can be made better off without somebody else becoming worse off.” If change occurs and we arrive at a Pareto efficient outcome, no further improvements can be made. The distribution of well-being matters, however. Later in the book, Coyle writes, “The claim is that 432 people now own half the country’s land area,” referring either to Scotland or the Highlands of Scotland (it is unclear which). Scots not among the 432 probably do not think that situation is best. People value efficiency and equity.

“The first theorem” of welfare economics, according to Coyle, “states that if a competitive market equilibrium exists, then it is Pareto efficient.” Some think this theorem endorses markets. Coyle seems to share that view, writing, “This theorem is the underpinning of the instinct in favor of competitive markets as a benchmark.” “The second theorem,” she continues, “says that given an initial allocation of resources, there is a set of competitive prices that support the Pareto efficient outcome.” The implication is that even if a government redistributes incomes, markets will re-establish a best situation.

The fundamental theorems are based on unrealistic assumptions such as the absence of barriers to enter markets. “The Pareto efficiency approach and welfare theorems nevertheless hold powerful sway in the worldview of economics in offering a conceptual framework for thinking about why, in any particular real-world context, competition and market exchange are not the social welfare-maximizing approach,” she writes. Because there are externalities, for example, markets do not lead to a Pareto efficient outcome. It would be a mistake, Coyle maintains, to downplay the incidence of market failures and adopt “a presumption in favor of ‘free markets.’ ” However, although market failures are omnipresent in her view, she is equally skeptical of government’s ability to correct them.

Government intervention: Governments attempt to improve markets by taxing, spending, transferring, and regulating. Take the case of a Pigouvian tax that corrects a negative externality. The social marginal cost of production exceeds the private marginal cost because of a negative externality such as pollution. The market clears at a quantity such that the marginal value is less than the social marginal cost; the quantity and the negative externality it produces are too high. Coyle shows how a tax on the sale of the good reduces the supply, raises the price, and moves the quantity toward the lower, optimal level; however, she notes that achieving that optimal outcome is difficult. She further adds that figuring the tax that yields the efficient outcome is complicated.

Given the difficult task of determining the optimal Pigouvian tax, some doubt that a negative externality can be corrected accurately. They prefer another path to the efficient outcome. Ronald Coase attributed externalities to ill-defined property rights. Coyle illustrates this with a case study: Farmers using nitrates in their production process clashed with Nestlé Corp. and its spring water bottling operation. Assuming property rights are well defined and transaction costs are sufficiently low, exchange eliminates externalities; however, that assumption can be difficult to realize. In the case of the farmers and Nestlé, there was a happy ending: Nestlé recognized the farmers’ property rights, buying land from some of them and paying others to use alternative production methods. Sufficiently low transaction costs made the deal possible. But just as some doubt that Pigouvian taxes and subsidies will produce efficient outcomes owing to information problems, some doubt that transaction costs will often be low enough to make a “Coasean bargain” possible.

Competition and market power: Readers will encounter no claims for the existence of fully free markets: a free market is “an abstraction that does not exist in reality,” Coyle writes. This is because “the state defines and assigns property rights, and enforces them through the judicial system.” One could be enthusiastic about the performance of markets and acknowledge the role of government in establishing property rights. Even she sees a role for “custom” in establishing property rights and roles for “social norms” and “social capital” in enforcing them. But in her view, government overrules those extralegal factors.

Although the author doubts the existence of a fully free market, she appreciates property rights. Also, her touting the benefits of competition is similar to an appreciation of free markets. To Coyle, competition is a matter of degree, depending on how closely a market approximates the assumptions of the fundamental theorems. Readers can ponder the irony of eschewing the free market as an abstraction while idealizing perfect competition. She proclaims:

Monopoly is bad, Coyle writes: “Monopoly power, when there are just one or a few big firms, means the reverse of all these good things.” She contrasts monopoly to competition: A monopolist restricts output and raises price. Many competitive firms expand the level of output; price falls to the marginal cost of production. “So moving from monopoly to competition increases welfare,” she explains, “and the perfectively competitive equilibrium is Pareto optimal.” Advocates of free markets will bemoan the author’s equating perfect competition with what is good and monopoly with what is bad, but they will approve when she recognizes that innovation is a source of monopoly and that market power based on innovation is “deserved.”

Governments intend to foster competition by evaluating mergers, examining the conduct of firms with large market shares, stomping out cartels, and regulating. Coyle writes at length on natural monopoly. The problem with this type of firm, whose average cost decreases over a large volume of production, is that consumers’ marginal value of the profit-maximizing output level will exceed the marginal cost of production. That violates efficiency; the profit-maximizing output level is below the efficient level.

In such circumstances, there are three options for public policy:

• The government could refrain from intervention. This is difficult for politicians and citizens who share a penchant for intervention.
• The government may require the firm to produce at the efficient level of output. Mandating the output level begets price regulation. The government may regulate the price to be the average cost of production, which enables the firm to break even. Or the government may regulate the price to be the marginal cost of production, in which case the firm must be subsidized so that it breaks even. The drawback is that “regulators rarely have enough information about supply and demand curves to implement it.” Therefore, regulators set limits on price increases or set limits on rates of return.
• Government could take over production of the good. Coyle gives the rationale for why a private producer under conditions of natural monopoly is objectionable. One is that private-sector monopolists “lack legitimacy” because both consumers and voters resent them. The implication is that government provision subject to the influence of voters would be legitimate.

Coyle takes up numerous cases of market failure and explains government policies designed to correct them. Then she admits, “All regulation tends to reduce competition.” The problem is that regulation acts as a barrier to enter a market. Among the regulations she lists are health and safety measures, price controls, and labor market rules. She highlights the market for taxi service. Eliminating the license to drive a taxi would increase the supply of drivers, lower the price of service, and reduce the time spent waiting for service. Deregulation meets resistance, however, from licensed drivers. Given that the benefits of deregulation are dispersed among many consumers of taxi service and the costs are concentrated on licensed drivers, politicians may appease the latter group. The market is a source of hope because entrepreneurial innovations increase competition. Coyle reports that Uber and Lyft’s entry into the market for taxi service reduced prices and waiting times.

Conclusion: Markets and governments play leading roles in the book. Nonmarket and nongovernment institutions do not get equal treatment, but they do get a chapter.

Coyle outlines Garrett Hardin’s “tragedy of the commons.” “The problem he diagnosed,” according to her, “is that resources held in common will be overused because rational individual decisions impose an external cost.” The pursuit of individual interest does not lead to what is good for all. Fishermen lack reason to refrain from overfishing, for instance, and the fish population will dwindle. Hardin saw two remedies: private property rights over the resource could be established, or the government could allocate the resource. But there is a third remedy: Coyle introduces Elinor Ostrom’s notion that there are “lots of types of institutions, not just (‘free’ or not) markets, and ‘the’ government.” For example, Japanese farmers use “associations” to allocate water and the San Diego Watermen’s Association manages the stock of sea urchins. Through her research, Ostrom discovered the necessary conditions for a community group to manage common pool resources. The gist of these “design principles” is that property rights must be enforced and free riding must be minimized.

Coyle dubs the revival of industrial policy “Industrial Strategy Redux.” Five market failures, she reasons, justify industrial policy. One is that there are “missing markets” to finance new ventures. Another is that firms cannot profit by producing “basic knowledge via research.” She cites examples of successful industrial policies. “For instance,” she writes, “US military-funded research created much of the basic structure of the internet and the global positioning system.” She cites Mariana Mazzucato’s argument that Apple used technologies financed by government agencies such as the Defense Advanced Research Projects Agency to create the iPhone. Coyle provides examples of industrial policy flops, too. She does offer some recommendations for better industrial policy, such as that “government financial support for a company should be offered on similar terms to a commercial loan.” She also suggests that “policy should address the specific market failures of under-provision of public goods, such as basic research, information asymmetries, and incomplete markets as in the case of new product.” Coyle is no missionary for industrial policy: for each one of her “arguments in favor” of it, she offers as many “arguments against.”

Benefit–cost analysis (BCA) is a useful tool for policy formulation. Although BCA is grounded in economic logic and mathematically precise, it is not necessarily definitive. Assuming different social discount rates leads to different policy recommendations. Coyle highlights BCAs of reducing carbon emissions. She writes, “A lower figure for the social discount rate makes the future net cost of environmental damage far greater, and likewise the net benefit of acting to avert it now.” That sounds sensible; a lower interest rate increases the profitability of long-term investments. But then she writes, “A social discount rate of 1.4% rather than 6% would multiply sixfold the discounted value of future climate damage in a hundred years from now.” She cites Partha Dasgupta’s “Comments on the Stern Review’s Economics of Climate Change” for that fact, but although Dasgupta reports the “social price of carbon” under different climate models, no one social price is six times any other. Perhaps this reviewer fails to understand what Coyle reports, but Dasgupta does write: “A higher value of eta [a component of the social discount rate] could imply that the world should spend more than 1% of GDP on curbing emissions, or it could imply that the expenditures should be less. Only a series of sensitivity analyses would tell.” The point is that BCAs do not settle the issue of whether it is better to act on climate change sooner than later.

Coyle writes a comprehensive exposition of how governments can help markets work better versus the pitfalls of government intervention. The author knows both sides so well that her presentation borders on the schizophrenic. In so far as she gives readers much to ponder without telling them which combination of market and government is best, she succeeds.