Economic efficiency seeks to ensure that there is no reallocation of society’s economic resources which can make someone better off while leaving everyone else no worse off. Competitive markets are the preferred institution for ensuring economic efficiency, but markets do not always achieve this end. Markets fail for a variety of reasons: public goods, spillovers, increasing returns to scale, and asymmetric information. In each instance, economic efficiency requires cooperative behavior to provide a shared asset, and each economic agent must reveal his or her true preferences for the shared good. fully

Markets, however, are often incapable of assuring truthful revelation in these cases; each market participant can successfully understate their benefits from the provision of the shared good. Thus if a market supplier provides the good, cost go uncovered, but alternatively, if no supplier offers the good, demands go unmet. One institution which can both cover costs and meet demands for public goods — albeit through coercion – is government. Government, however, must solve the same problem of truthful revelation which undermines market performance. The federal form of government offers two means to solve the revelation problem: A system of competitive, decentralized local governments and a democratically elected national government. Which form of government is used need not be an either or choice, for both are available with a federal constitution. The logic of subsidiarity is offered to help us choose.