I think that before we start seriously discussing the addition of any governmental system to a game like this, we need to lay down some basic groundwork on
what to discuss. Here are some topics that i think government discussion should cover, in the order we ought to discuss them:
1) How many and what kinds of country leader(s) should there be? Should it be a counsil, or a single dictator, or what? And also, what do you call them?
2) What powers should the leader(s) have? Should they have a military/police force? Should they control monster levels, shop prices, etc.?
3) How should the leader(s) be chosen, and by whom? How long should they serve for? And finally:
4) Should the leader(s) becom corrupt (as some inevitably will), how can the players overthrow them before they cause harm?
That said, here is my general idea:
1) There should be at least two aspects of the leaders, one council and one really powerful leader (kind of like american congress vs. the president). Each should have their own powers, and each should have the ability to keep the other in check somehow, such as vetoing bills and whatnot.
2) The leaders should have the ability to do all of the above. In a really cool MMO, wild monsters would "breed," and there would be a constant potentially for the population to get out of hand. In this case, the leaders should commission a military/police force to lower monster levels. Conversely, players could start over-killing monsters and reduce the population, in which case the leaders would have to set aside "reserves" and "ranches" for certain monsters, to keep the levels in certain ranges.
The leaders should also influence, although not directly control sho prices. That is, they can make suggestions to NPC shops, and then the AI will determine whether or not and to what extent the NPC will follow that suggestion.
Also, the leaders should have control of a certain military which can put out mission for players (such as killing certain monsters, or helping build a reserve). The available rewards ought to be limited by the actual possession of the government (basically, they can't make money appear out of thin air, they must have a treasury or something somewhere), and determined by the leaders.
3) The leaders should be voted for by the players. The council should be formed first, and should be of a reasonable size. Council members should have longer terms that the powerful leaders, but be easier to extridate(sp?). This way, "good" council members will remain longer, and be able to keep the rest of the council, and the one powerful leader, in check, as well as help to ensure that the government remains relatively effective and efficient.
4) Large groups of players should be able to band together to overthrow the current government, and replace the former leaders with it's own members. I haven't figured out a much mroe specific method than that, but it shouldn't be something too easy to do, otherwise there would be constant political fluctuations. Conversely, it shouldn't be too hard to do, or evil leaders would remain in power for much too long.
One final note I would like to add is that no matter what kind of system you implement, there will always be corruption, evil, selfishness, etc. at some point. This is not necessarily a bad thing, as it could spice up the game considerably, and make it still more interesting.
P.S. sorry for the excessively lengthy post... this is such an interesting topic.