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For ages, the role of state control in economy has been a major topic for discussion. Strangely enough, only its minimum task is comparatively clear − to increase allocation efficiency in case of market failure. On the other hand, accomplishing this task involves several problems and raises challenging issues for research. In the first place, there are practically no market-failure-free economies, which means that nor is there a universal threshold for state interference. In reality, the latter depends not only on the extent of market failure, but also on the government’s ability to make its interference work towards achievement of a positive welfare balance. The second relevant fact that non-trivial economic and political suggestions must reckon with is the private economy’s ability to generate special mechanisms (institutions) for dealing with market failures. A host of economic phenomena (e.g., vertical integration, inflexible prices, etc.) which in the past used to be considered signs of market imperfection, are nowadays more readily viewed as a reaction to other market problems (usually transaction costs due to lack and asymmetry of information). The aim of the current project is to study the need and possibilities for government interference in the specific conditions of Estonia, in the case of major market failures (such as information asymmetry, foreign influences, advantages created by size, and sunk costs), considering at the same time both the country’s administrative capacity and private economy’s ability for adaptation. |