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The Limits of the MarketThe Pendulum Between Government and Market$
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Paul De Grauwe

Print publication date: 2017

Print ISBN-13: 9780198784289

Published to Oxford Scholarship Online: January 2017

DOI: 10.1093/acprof:oso/9780198784289.001.0001

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External Limits of Capitalism

External Limits of Capitalism

(p.19) Chapter 3 External Limits of Capitalism
The Limits of the Market

Paul De Grauwe

Oxford University Press

The theme of this chapter is the discrepancy between individual and collective rationality which occurs when individuals do not take into account external effects of their individual decisions. In a market system individuals have no interest in considering external effects. The problem is felt in three domains. Firstly an uncontrolled market system leads to degradation of the environment, which increases as the market system expands. A public harm is therefore created and becomes increasingly important. Secondly, the expansion of the financial markets during an economic boom also leads to public harm, namely the instability of a more risky system from which no one can escape. Thirdly, paradoxically enough, the expansion of the market leads to a decrease in interest in public goods.

Keywords:   global warming, public goods, financial instability, free-rider problem, external effects

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