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Market Failure and Government Intervention

Most of the studies in Figure 17-7 involve quantification of costs or benefits.  However, many types of studies focus on more subjective information.  Particularly important among these subjective studies is the industry study. Government interventions in market structure, particularly antitrust interventions, typically required industry studies to be undertaken. The industry study focuses on the structural characteristics of a market including the market boundaries, the number of buyers, the number of suppliers, product differentiation, and underlying cost and demand characteristics of a market.  From the structural characteristics of the market, conduct and performance are projected and investigated.  While some quantification is necessary for such studies such as measuring the concentration or the Herfindahl index in the market, benefits and costs are often not quantified.  Typically such srtudies are used to determine the effect of government intervention in the market, particularly to bring about structural changes such as interfering with mergers or breaking up firms with too much market power.

Because THE government and the private sector often speak apparently different languages while using exactly the same terminology it is not surprising that very few of the studies used by the government are at all similar to what is done in the private sector. In Figure 17-8, note that “Cost benefit analysis” for government and the private sector are very different.  While the priave sector looks at costs and benefits to the stockholders, the government looks at the benefits and costs from the point of view of stakeholders i.e. to whomever such benefits or costs accrue (or, perhaps, more accurately to whoever votes).  The private sector doesn’t do regulatory impact analysis or fiscal impact analysis.  Economic impact analysis is something the private sector might testify about but would never conduct itself.  Closure analysis, on the other hand, is simply redundant to the income statement analysis that firms conduct.  However,

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