Regulation restrains the unfettered market power of firms. What are the legitimate reasons why governments
might choose to override the decisions made in free markets? There are three major publiNnteml jwlificalions of regulation. The first is to regulate firm behavior to prevent abuses of market power by monopolies or oligopolies. A second major reason is to remedy informational failures, such ‘as those which occur when consumers have inadequate information about the characteristics of important products like drugs or energy-using appliances. A third reason is to correct externalities like pollution-this is the subject of social regulation, studied in the next chapter.

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