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Market Failure and Optimal Intervention

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 A Teaching Topic in Economic Analysis

Market Failure and Optimal Intervention

This topic discusses the various reasons for market failure including moral hazard, information asymmetry and externalities. This topic also discusses the advantages and disadvantages of different strategies for government intervention designed to reduce the undesirable impact of market failures.

Topic Learning Outcome: Appropriately utilize and interpret results of applying the principles of market failure and optimal intervention to the analysis of public policy and management problems.

Core Concepts associated with this Topic: Market Failure; Moral Hazard.

Recommended Reading

Harvard Kennedy School: API-101

Pindyck, Robert S. and Daniel L. Rubinfeld. Microeconomics, 8th Edition. Prentice-Hall, 2012. Chapter 10 (Pp. 357-385, 389-392)

NYU Wagner: GP-1018

Krugman, Paul and R. Wells, Microeconomics, 3rd edition. London: Worth Publishers, 2012. Chapters 6 and 7 (up to pg. 201)

Johnson-Shoyama: JS-805

Weimer, David L. and Aidan R. Vining. Policy Analysis, 5th edition. London: Longman Publishers, 2011. Chapters 6 and 7

George Washington: PPPA-6003

Mankiw, N. Gregory. Principles of Microeconomics, 6th edition. Mason: South-Western College Publishers, 2011. Chapters 6 and 8

Wheelan, Charles. Naked Economics: Undressing the Dismal Science. New York: W. W. Norton & Company, 2010. Chapter 4

American: PAUD-630

Krugman, Paul and R. Wells, Microeconomics, 3rd edition. London: Worth Publishers, 2012. Chapter 5

 Sample Assessment Questions:

1.) What is market failure? Identify two different potential causes of market failure and, using examples, one policy tool available to policymakers when each type of market failure occurs.

2.) What is moral hazard? Why is this an important concept for students of public management to understand?  

Page updated by Sean Goertzen and Ben Eisen on 16 April 2015.


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© University of Toronto 2008
School of Public Policy and Governance