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Market Failure and Government Intervention

Figure 17-9  Private Studies

Each new type of study is likely to ignore certain costs or benefits and have its own peculiar assumptions.  Generally, by knowing what has been ignored, it is possible to guess what biases may creep into governmental choices based on a given type of study.  A manager should be able to step back from any type of government report, read between the lines on what the report is trying to do, and be able to criticize it effectively.  Since most agencies are required to open regulations up for public comment before imposing them, a manager who can deliver an effective criticism may be able to forestall or improve a potentially harmful regulation.

Perhaps the most unsettling government failures are the ones which actually produce worse results than the market failures they are designed to cure.  The rest of this section focuses on how government itself can exacerbate market failures.

A. Market Power

Ideally government should try to promote competition in markets.  While antitrust is the government's tool for fostering competition, much of antitrust effort is aimed at prosecuting price conspiracy behavior rather than altering the structural characteristics in a market which might lead to better competition.   Antitrust policy is not aimed so much at monopolists as at oligopolists trying to achieve monopoly.  

Government contracting and subsidy activity may actually enhance market power.  There

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