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The concept of market failure refers to the numerous ways in which real markets fail to display the characteristics and performances of theoretical or perfect markets and/or to generate social outcomes that are analytically superior to those produced by other means of societal allocation. The modern conception of ideal market exchange and its perceived benefits dates at least to the classic work of Adam Smith in The Wealth of Nations (1776).

Characteristics of a Perfect Market

The concept of a “perfect market” is an abstraction. A perfect market is an exchange system featuring many buyers and sellers; actors who pursue rational self-interest with completely free choice and stable preferences; perfect information held by all the actors; goods that are all private in character in that their consumption ...

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