Institutions Matter: An Introduction to the Role of Institutions in Public Policy

Institutions play a critical role in coordinating people’s behaviour and helping achieve socially optimal outcomes. This chapter explores the relationship between institutions and public policy, defining institutions from an economic perspective and explaining how and why some persist whilst others change. It uses a case study from the Murray-Darling Basin in Australia to demonstrate how innovative policy design can improve social, economic and environmental outcomes. Ultimately, it helps show how hybrid institutional arrangements, which integrate market design within formal legislative frameworks, are able to deliver more efficient and effective outcomes.