Summary
To summarize, the following four situations result in market failures and,
at least in principle, provide a rationale for government intervention:
1. Firms with market power will generally charge a price greater
than marginal cost. The level of output in these cases is less than
the allocatively efficient level.
2. When there are externalities, either social and private marginal
costs are not equal or social and private marginal benefits are not
equal. If there is a negative externality, output will be greater than
the allocatively efficient level. If there is a positive externality,
output will be less than the allocatively efficient level.
3. Common-property resources will be overused by private firms
and consumers. Public goods will be underprovided by private
markets.
4. Situations in which there is asymmetric information—both moral
hazard and adverse selection—can lead to allocative inefficiency.These situations of market failure justify a role for government
interventions in a market economy, many of which we will examine in
Chapters 17 and 18. We now explore some reasons for government
intervention that are not based on market failures.