Market Failure And The Implications For Public Policy

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When discussing the concept of Market Failure and the implications for Public Policy, the correlation, between the two is directly related to government intervention on market efficiency. Market Failure is discussed in the context of Pareto efficiency in the Free Market. Certain conditions must be met or Market Failures are inevitable and the government must intervene to correct the market. The first fundamental theorem of welfare economics asserts that under certain conditions which makes markets not Pareto efficient results in Market Failure (Stiglitz, 2000, p. 77). The conditions of market failure results when marginal cost (MC) does not equal marginal benefit (MB) and neither equals price (P), to reach equilibrium MC=MB=P and the market is Pareto efficient. The conditions under which there is not Pareto efficiency in the market and results in Market Failure are; failure of competition, public goods, externalities, incomplete markets, information failure, unemployment, inflation and disequilibrium (Aikins, 2015). If any of these conditions exist in the market, it provides the justification for government to address the failures through policies designed to reach Pareto efficiency. Pareto efficiency or Pareto optimal is defined as, to have resource allocation that have the property that no one can be made better off without someone being made worse off. Pareto efficiency in free markets incorporates involvement where Government is expected to protect citizens and
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