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Market failure theories underlie most economic arguments for government intervention in the economy. When markets operate in accordance with standard economic assumptions, no person can be made better off except by making someone else worse off. The range of government activity in such a world consequently is constrained. However, when markets fail to operate in accordance with the standard model, government policy may improve economic outcomes by ameliorating the market failure.

Efficient Markets: The First and Second Welfare Theorems

Economists define market failure against a theoretical, ideally operating economy. When individuals are free to trade in a competitive marketplace where no externalities in production or consumption exist, the resulting distribution of resources in the economy is Pareto efficient: no person can be made better off without making ...

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