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8.3 Circumstances in Which Market Regulation May Be Desirable

When a market operates inefficiently, economists call the situation a market failureThe situation that occurs when a market operates inefficiently.. In this chapter, we will address the generic types of market failure:

  • Market failure caused by seller or buyer concentration
  • Market failure that occurs when parties other than buyers and sellers are affected by market transactions but do not participate in negotiating the transaction
  • Market failure that occurs because an actual market will not emerge or cannot sustain operation due to the presence of free riders who benefit from, but do not bear the full costs of, market exchanges
  • Market failure caused by poor seller or buyer decisions, due to a lack of sufficient information or understanding about the product or service

In all four situations, the case can be made that a significant degree of inefficiency results when the market is left to proceed without regulation.

Economists are fond of repeating the maxim “There is no free lunch.” Regulation is not free and is difficult to apply correctly. Regulation can create unexpected or undesirable effects in itself. At the conclusion of the chapter, we will consider some of the limitations of regulation.