Market transactions involve consensual exchanges and contracts. Government actions and regulations depend on legal authority backed by the threat of force. Market and regulatory activity appear to be opposite in nature. But things are not so simple. For one thing, functioning markets rely upon a sound legal framework. For another, governments and their regulatory agencies can intervene in markets in widely varying ways. While many interventions clearly aim to push and compel people in markets to alter their behavior, others are more facilitative.

The legal rules that support markets at any particular time may not be optimal. Markets are shaped by the existing level of technology, transaction costs, and social organization. Governments—as well as businesses—can improve the functioning of the economy by carefully designing better markets. These enhanced or “smart markets” may come about through various means. These include providing information, solving “public goods” and “market failure” problems (while being cautious about replacing these with “government failure”), internalizing externalities, promoting transparency, and reducing transaction costs.

This topic covers all of these approaches. It also covers the way in which businesses can design, create, and harness smart markets to improve decision making, forecasting, and risk management. The topic also looks at how we can better understand and shape markets through bottom-up simulation (such as agent-based modeling) rather than top-down macroeconomics, and how smart markets can improve environmental responsibility without eroding profitability.