Previous Chapter Chapter 26: Regulatory Economics Next Chapter

Christopher S. Decker

In: 21st Century Economics: A Reference Handbook

Chapter 26: Regulatory Economics

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Regulatory Economics
Regulatory economics

Economic theory establishes that in a free and unfettered market, characterized by intense competition between many well-informed buyers and sellers, where resource mobility is possible, a socially efficient allocation of an economy's resources is generated. Characteristic of perfectly competitive markets, this social efficiency is measured as the maximization of total market surplus—that is, the sum of consumers' and producers' surpluses is maximized at a market-determined equilibrium price. For the individual firm, the consequence of this intensely competitive market is that price for the seller is determined within the market, and the only profit-maximizing mechanism available to the firm is to set production levels such that profits are maximized. This occurs when the firm's marginal cost of production equals the market price. Any ...

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