ABSTRACT
A role played by government in a mixed economy involves providing an alternative to the market allocation mechanism.1 As explained in Chapter 1, government provides a desirable alternative to the unfettered market in two circumstances: cases in which the market works properly but produces an efficient outcome that is in some way not desirable, and cases in which the market does not work properly owing to a violation of one or more of the assumptions of perfect competition. Situations in the latter category are often referred to as market failures. Market failure is a common justification for government intervention in the market system. Among the general types of market failures are: market power, asymmetric information, externalities, discrimination, incomplete markets, unemployment, and inflation. Several of these forms of market failure are intimately linked to the characteristics of the good or service of interest. Therefore, it is important to understand the linkage between the characteristics of goods and services and the potential for market failure.2
