Managerial Economics and Strategy, 2/e

16.1 Market Failure and Government Policy

A perfectly competitive market achieves economic efficiency: It maximizes total surplus, the sum of consumer and producer surplus (Chapter 8). This property is one of the strongest arguments for relying on competitive markets without government intervention. However, most markets fall short of perfect competition, and some exhibit a significant market failure, which substantially reduces economic efficiency and results in deadweight losses. Thus, one important rationale for government policy is to reduce or eliminate market failure. By eliminating a market failure, society can recapture the deadweight loss.

In addition to wanting to reduce deadweight loss, society may care about who benefits and who loses ...