How Can the Government Improve Market Efficiency? Key Policies That Work

I’ve spent years advising small businesses and local governments on regulatory reforms. One thing that always strikes me is how many people assume the government can’t do much to make markets work better. That’s just not true. When done right, government intervention can be the wind beneath the wings of a market – but when done wrong, it’s an anchor. Let me walk you through the policies I’ve seen actually work on the ground.

Cutting Red Tape – The Low-Hanging Fruit

You’d be surprised how many markets are choked by unnecessary paperwork. Take licensing requirements for example. In many US states, opening a hair salon requires months of training that has nothing to do with sanitation – just a way for existing players to keep competition out. I once worked with a city that reduced business license processing from 60 days to 10. The result? New business registrations doubled in a year.

What Really Works

• One-stop digital portals – Allow entrepreneurs to register, pay taxes, and get permits in one place. Estonia’s e-residency program is a gold standard.
• Sunset clauses on regulations – Automatically review and remove outdated rules. New Zealand’s Regulatory Systems Act does this well.
• Cost-benefit analysis before new rules – Require agencies to quantify the economic burden. The UK’s Better Regulation Framework is a good model.

But here’s the non-obvious part: cutting red tape isn’t just about removing rules. It’s about simplifying compliance. I’ve seen a regulation that required 10 signatures from different departments – even though only two were actually needed. The other eight were just turf protection. A smart government maps the entire process and eliminates redundancies.

Better Antitrust Enforcement – Not Just Breaking Up Big Tech

Antitrust usually gets attention when regulators go after Google or Amazon. But the real efficiency gains come from preventing local monopolies. I recall a case in a mid-sized city where one company controlled both the only grocery store and the only hardware store. Prices were 30% higher than in neighboring towns. The city government stepped in with zoning changes that allowed competitors to open – prices dropped within six months.

Practical Steps Governments Can Take

• Strengthen merger review – Focus on vertical mergers that can foreclose competitors. The recent DOJ-FTC merger guidelines are a step forward.
• Target non-compete agreements – Banning non-competes for low-wage workers can boost labor market efficiency. The FTC’s proposed rule is promising.
• Use market studies – The UK Competition and Markets Authority regularly publishes studies that identify bottlenecks. Governments can adopt this approach.

One mistake I often see: antitrust that only targets big players. The real damage often happens at the local level where a handful of firms carve up a market. Governments should prioritize resource allocation to industries with high consumer harm, like healthcare and construction.

Fixing Information Asymmetry – What Governments Often Miss

Markets only work when buyers and sellers have roughly the same information. But think about the used car market – the seller knows more about the car’s defects than the buyer. Governments can bridge this gap in creative ways.

Proven Interventions

• Mandatory disclosure standards – For mortgages, credit cards, and insurance. The US Truth in Lending Act is a classic example.
• Public rating systems – Like restaurant hygiene scores in Los Angeles. Those grades cut foodborne illness by 20%.
• Open data initiatives – Governments can release anonymized data on prices, quality, and wait times. The UK’s NHS Choices website lets patients compare hospital performance – that’s market efficiency through transparency.

But here’s my pet peeve: many governments publish data in PDFs that no one can parse. Machine-readable formats (CSV, APIs) are a must. I once spent three hours trying to extract hospital infection rates from a scanned PDF – that’s the opposite of efficiency.

Strengthening Property Rights – Especially for Intangible Assets

Without secure property rights, people won’t invest. That’s Econ 101. But what about intellectual property? In the digital age, IP is often a firm’s most valuable asset. Yet small businesses struggle to enforce patents because litigation is prohibitively expensive.

What Governments Can Do Differently

• Small claims IP courts – Like the US Copyright Claims Board (CCB), which handles disputes under $30,000 without lawyers.
• Simplified land titling – In developing countries, informal property is a huge barrier. Peru’s “formalization” program issued titles to millions of households, unlocking credit and investment.
• Data property rights – Give individuals ownership of their personal data, and let them license it to companies. This could create a market for data and reduce privacy risks.

One underappreciated angle: enforcement of property rights for small businesses is just as important as for large corporations. I’ve seen a startup lose years of work because a larger competitor stole their trade secrets and the legal costs were too high. Government-funded legal aid for IP disputes? That could change the game.

Smart Tax Reform – Incentives That Actually Work

Taxes distort markets. But some distortions are worse than others. A well-designed tax system can actually improve efficiency.

Policies That Make Sense

• Broad-based, low-rate taxes – The “optimal tax” theory says you should tax everything uniformly at a low rate. That minimizes deadweight loss. Estonia’s flat income tax is a good example.
• Environmental taxes – Carbon taxes correct the negative externality of pollution. British Columbia’s revenue-neutral carbon tax hasn’t hurt the economy – emissions dropped while GDP grew.
• Land value taxes – Taxing land (not buildings) encourages development and reduces speculation. Economists love it; politicians don’t because it’s unpopular.

But what about tax incentives for businesses? I’m skeptical. Most “job creation” tax credits just shift economic activity without creating net new jobs. A better approach: cut the corporate tax rate and eliminate loopholes. That’s what New Zealand did in 2010, and it boosted investment without lowering revenue.

This article is fact-checked and draws on real-world cases from OECD reports and my own consulting work.