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Why Should Governments Encourage Improvements in Infrastructure? Indirect Network Externality of Transaction Efficiency

PFM, Vol. 7 No. 4, (2007)

Governments have been very active in engaging in and in encouraging the improvements in transaction efficiency, including the provision of legal, social, and economic infrastructure. While this may partly be explained by the public goods nature, the presence of indirect network externalities due to the economies of specialization may also be important. The improvement in transaction (including communication and transportation) efficiency may generate benefits in excess of the direct private benefits through the promotion of division of labour that leads to more economies of specialization and the availability of more goods in the market. This is shown in the Yang-Ng framework of inframarginal analysis.

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