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When a market operates inefficiently, economists call the situation a market failureThe situation that occurs when a market operates inefficiently.. In this chapter, we will address the generic types of market failure:
In all four situations, the case can be made that a significant degree of inefficiency results when the market is left to proceed without regulation.
Economists are fond of repeating the maxim “There is no free lunch.” Regulation is not free and is difficult to apply correctly. Regulation can create unexpected or undesirable effects in itself. At the conclusion of the chapter, we will consider some of the limitations of regulation.