Risk and Economic Policy

Jack Mintz and Douglas Purvis

Canadian Public Policy, 1990, vol. 16, issue 3, 298-307

Abstract: In this paper, we argue that much of the debate regarding the role of government policy in mitigating economic instability has failed to give sufficient attention to the role of capital markets. We argue that in an economy with well-functioning markets for risk-bearing, direct public intervention to offset the effects of economic instability is not in general justified. The case for active public intervention in minimizing economic instability is not general justified. The case for active public intervention in minimizing economic instability relies on 'imperfections' in the market economy. We distinguish between diversifiable risks, which create independent gains and losses for individuals, and non- diversifiable risks, which leads to gains or losses for individuals which are not offsetting. We also distinguish between risk-bearing market policies, which are directed at allowing the private sector to handle economic instability better, and stabilization policies, which are intended to offset the source of economic instability faced by the private sector. We argue that in some cases risk-bearing market policies are better, while in other cases stabilization policies are better.

Date: 1990
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