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Enforcement Against Market-Driven Misconduct

By Richard M. Cooper
May 24, 2005

Government plays a critical role in the design of some free markets and in the operation of many. The recent energy debacle in California resulted in part from defective governmental design of California's markets for wholesale and retail electricity. Even where markets are shaped largely by private-sector activity, government often has a critical role in influencing the incentives that guide conduct in those markets. In particular, law enforcement agencies, especially regulatory agencies, have a critical responsibility for the proper functioning of competitive markets within their jurisdiction — the responsibility to elaborate and enforce applicable laws so as to constrain market forces from driving participants into socially undesirable conduct.

As a Stanford Business School professor has put it: “The main way the government sets the rules of the market game is by writing laws and maintaining the machinery to enforce them. Laws are needed to guard against theft and fraud, to define and protect property rights, and to support contracting … Regulation sometimes is needed to supplement the courts – usually not direct regulation of firms' day-to-day activities but oversight to ensure markets are doing what they are supposed to do.” John McMillan, Reinventing the Bazaar: A Natural History of Markets 175 (2002).

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