POlicy Harmonization in Integrated Common Factor Markets

The transfer of sovereign states in a common market is effected by the policy choices of all memeber states. The free mobility of goods and factors of production creates the policy externalities. The European Union, for example, is working towards comletely free movement of citiens between member states and equal access for migrating citizens to host-state public services. Without interstate policy cooridination, factors of production are inefficiently distributed. With an appropriately chosen agreement to share the dividends from policy coordination (and example is the Nash Bargaining allocation), states are induced to adopt efficient public policies.