Market governance failure

While there are criteria to distinguish which decisions might best be made through markets and which through governance, economists have generally neglected how the extent of markets per se affect the costs and thereby the effectiveness of governance. We provide a simple heuristic model and use assumptions typically made in economics to illustrate how expanding markets affect an externality and the transaction costs of governing the externality. We show that the extent of markets would be constrained if these governance costs were included in economic analyses.