ABSTRACT
It is important to remember that divergences from perfect markets are not necessarily bad things in themselves – positive externality is a good example (see 7.2 below). Divergences merely imply that ef cient outcomes will not be forthcoming if the market is left to freely determine price, output and the allocation of consumption and production. Of course, perfectly ef cient outcomes are likely to be out of our reach by any means. Once a divergence is identi ed, the challenge is to nd a strategy which responds to the resulting inef ciency and will perform better than leaving the market to its own devices. In many cases there may be no such strategy, especially if the resulting inef ciency is not great. Government intervention is recommended only if likely government failure to intervene perfectly is less than the market failure under assessment.
