Promoting More Efficient Markets

Before’ studying economics, many people think that the government needs to be a watchdog guarding consumers against monopolistic abuses “and price gouging. Once encountering the invisible hand theory, we might be more reluctant to intervene, however, because economics teaches us that competitive markets can lead to efficient production and pricing. For the most part, governments in market economies today rely on the force of rivalry and competition carrot of profits and the stick of bankruptcy- to stimulate the private sector to behave efficiently But the forces of competition cannot work effectively ,when competitors are absent or feeble. When there is excessive market power. government can take steps to promote competition. There are other market failures that-may call for government intervention, Sometimes people may not have adequate information to judge product quality. So the government requires that drug companies demonstrate the safety and efficacy of new drugs.

The government also regulates industries like banking and electricity, tries to protect consumers from false advertising and financial misrepresentation, and engages in zoning decisions which control the economic use
of land. How can governments best promote efficient markets? How best to control market failures without hindering the powerful efficiency gains of unfettered market competition and rivalry? Sometimes, the public interest compels regulation in a limited domain; at other times, economic regulation creates more, problems
than it solves, and governments are well advised to deregulate a sector. Public policy in this area-focusing’ on regulation and antitrust-is surveyed in this chapter

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