Market Failures and Government Regulation: Is the Cure Worse than the Disease?


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Economic efficiency is something much more than producing goods at the lowest possible cost. It involves providing individuals with the goods and services they desire, in the quantities, qualities, places, and times they desire them, with the least use of society's scarce resources. Economists argue that if markets are competitive, if accurate information is available, if resources are mobile, and if individuals engaging in the transactions bear the full costs and receive the full benefits of their transactions, economic efficiency will be achieved.

Markets rarely meet all these criteria, and when deviations from the ideal occur, the result is said to be market failure. Of course, most deviations from the ideal are minor and do not impose significant costs on society. But when deviations are significant there is often a call for government to do something about the problem. For example, markets can deviate significantly from the competitive ideal -- e.g., firms may acquire significant market power, undertake deceptive practices, collude, etc. Government has two tools for correcting this type of market failure: antitrust laws and economic regulation.

Antitrust laws forbid the use of certain practices that are detrimental to competition. Essentially, antitrust laws set up the rules of the game. If firms do not violate these rules, they are free to produce and sell their products as they see fit. This lesson is not concerned directly with antitrust issues; it is concerned with regulatory issues. Specifically, it is concerned with the costs and benefits associated with economic and social regulation. It will provide information about the costs and benefits of regulatory programs and how government imposes hidden taxes on consumers through its regulation of businesses.

The Minute will focus on information in one website: This website provides links to many other sites that provide surfers with a wide variety of viewpoints on the issues presented. The first three items under THE FACTS heading on The Regulation Home Page are concerned with general regulatory issues. Students should read these to prepare to answer the questions in the following section.



1. What is economic regulation and how does it differ from antitrust legislation?

2. What is social regulation and how does it differ from economic regulation?

3. Has there been any movement to change regulation in recent years?

The Importance Of Regulatory Policy

1. Why do we care about regulation?

2. Has there been a significant increase in regulation in the recent past?

3. Has the cost of regulation increased as a result of the proliferation of new regulations?

4. Has the distribution of the costs of regulation changed?

5. Which businesses are hit especially hard by the costs of regulation?

Activities that may be appropriate for research and classroom discussion

There has been significant deregulation, specifically economic deregulation. What have the effects of deregulation been?

What are the Costs of Environmental and Risk Regulation?

Recently, the insecticide DDT has come back into the news. There are calls for a complete worldwide ban on DDT by 2007. Access the Junk Science site listed below. Access the September 3, 1999 article from the Economist magazine concerning banning the insecticide DDT on the Junkscience: Archives - September 1999 page .

While the article is somewhat sympathetic to the banning of DDT, the scientific evidence certainly does not support of the ban. The scientific evidence is found at the same place. Click on the reference "100 things you have to know about DDT." Read also the September 2, 1999 article by Ken Smith titled "Save Malaria Now." Note the benefits and the costs of the proposed ban. Has scientific evidence supported the proposition that the benefits of the ban exceed the costs?