ABSTRACT
Until the early 1960s the prevailing theory of regulation regarded market failure as the motivating reason for regulatory intervention. Statutory regulation or public ownership were supposed to eliminate or reduce the inefficiencies engendered by particular types of market failure. Behind the notion of market failure is one of the most celebrated results of neoclassical economics which has come to be known as the fundamental theory of welfare economics. This theorem states that, under some assumptions, competitive markets lead to an efficient allocation of resources, that is, to a situation where there is no rearrangement of resources-no possible change in production and consumption-such that someone can be made better off without, at the same time, making someone else worse off. Such a situation is said to be Paretoefficient (or Pareto-optimal), after the Italian economist and sociologist Vilfredo Pareto (1848-1923) who first formalized the notion of economic efficiency.
