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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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Internal Limits of Governments

Internal Limits of Governments

(p.81) Chapter 8 Internal Limits of Governments
The Limits of the Market

Paul De Grauwe

Oxford University Press

Governments are called on because the market system appeals too little to the emotional System I. Governments must correct the great inequalities a market system can cause, but they can go too far in this, running up against their own internal limits, which relate to the fact that System II, which causes us to long for rational, autonomous choices, becomes repressed. When this repression becomes too great, there is a loss of economic efficiency, and if this is too great, society rejects the system. The internal limits of government action, however, can also spring from System I. Our sense of fairness causes us to long for a system of social security, which can only be guaranteed by government. But if the government does not keep moral hazard under control, there is a backlash springing from a sense of fairness offended by too many ‘free-riders’, and social security may be cut back.

Keywords:   Fairness, social security, winner takes all, redistribution and efficiency, moral hazard

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