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Market Failure

Ledyard, John O. (1991) Market Failure. In: The World of Economics. Palgrave Macmillan , London, pp. 407-412. ISBN 978-0-333-55177-6.

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The best way to understand market failure is first to understand market success, the ability of a collection of idealized competitive markets to achieve an equilibrium allocation of resources which is Pareto optimal. This characteristic of markets, which was loosely conjectured by Adam Smith, has received its clearest expression in the theorems of modern welfare economics. For our purposes, the first of these, named the First Fundamental Theorem of welfare economics, is of most interest. Simply stated it reads: (1) if there are enough markets, (2) if all consumers and producers behave competitively, and (3) if an equilibrium exists, then the allocation of resources in that equilibrium will be Pareto optimal (see Arrow, 1951, or Debreu, 1959). Market failure is said to occur when the conclusion of this theorem is false; that is, when the allocations achieved with markets are not efficient.

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Additional Information:© 1991 Palgrave Macmillan, a division of Macmillan Publishers Limited.
Record Number:CaltechAUTHORS:20170918-122035887
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Official Citation:Ledyard J.O. (1991) Market Failure. In: Eatwell J., Milgate M., Newman P. (eds) The World of Economics. The New Palgrave. Palgrave Macmillan, London
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:81528
Deposited By: Tony Diaz
Deposited On:19 Sep 2017 17:21
Last Modified:15 Nov 2021 19:44

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