Managerial Economics and Strategy, 2/e

Summary

1. Market Failure and Government Policy. A perfectly competitive market achieves economic efficiency—it maximizes total surplus—so government intervention can only reduce total surplus. In contrast, in markets that are not perfectly competitive, market failures occur—total surplus is not maximized—which provides an important rationale for government action. Ideally, the government intervenes to make a Pareto improvement: a change that helps some people without harming anyone. An alternative approach to choosing government policies is the cost-benefit principle: The government imposes a policy if it results in a net benefit to society because the winners gain more than others lose. If the government can require that gainers compensate losers, ...