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Market Failure & Role of Regulation - >Regulation...

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RRS I – What is a Regulation Emergence of Broad Framework of Study Are we regulating or de-regulating? Feedback – Market failures -> Regulation
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Framework Free Market Competitive Forces Market Efficiency Market Failure Regulation Regulation Equitable Distribution Objective of Regulation – Market Efficiency and Equitable Distribution
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Types of Market Perfectly Competitive Market Goods/services offered are all same Numerous buyers and sellers and no single buyer or seller can influence  the market price - price takers Oligopoly Few sellers Each participant is aware of the actions of the others Monopolistic  Goods/services are slightly differentiated Numerous sellers – each seller has some ability to influence the price Monopoly No substitute available for the goods/services offered Only one seller and this seller sets the price – price maker Free Market Competitive Forces Market Efficiency
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Perfectly Competitive Market Free markets allocate Supply of goods to the buyers  who values them most Demand for goods to the sellers  who can produce them at least  cost Free market produces the quantity of  goods that maximizes the sum of  consumer and producer surplus Competitive forces efficiently allocate  the scarce resources (Arrow, Kenneth, and Debreu, Existence of an  equilibrium for a competitive economy, 1954 – Formal  proof under which the market equilibrium is Pareto  efficient) Free Market Competitive Forces Market Efficiency
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The Invisible Hand Adam Smith stated in 1776, “ …while he intends only his  own gain…he is …led by an  invisible hand  to promote  an end which was no part of his intention…” – that is to  maximize the wealth of the nation The competitive market guides and controls the self  seeking activities of each individual to maximize the  wealth of the nation.  Laissez faire  – “Allow them to do” opposes state  economic interventionism  (George Whatley, Principles of  Trade, 1774) Free Market Competitive Forces Market Efficiency
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What is a Market Failure Market failure occurs when freely functioning  markets, operating without government  intervention, fail to deliver an efficient or optimal  allocation of resources Therefore economic and social welfare may not  be maximized This leads to a loss of economic efficiency Market Failure Regulation
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Brief History of Market Failure Preclassical economics – primarily government regulation; nineteenth century  classical economics  – harmonization of self interest and social interest; neoclassical 
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