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Market Failures and Government Intervention

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If markets are efficient, then why should the government ever intervene in the economy?

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Solution Summary

This solution explains how and why the government should intervene in the economy in response to three types of market failures.

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Because of market failures. In some cases, pure self-interest in a market economy does not lead to the level of production most beneficial to society. Examples include:

1. Monopoly power. A firm that grows large enough to control the entire market can decrease production and raise prices to increase ...

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