General Equilibrium, Market Failure, and Policy

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Part "b"

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Quite apart from the socialist attack on the idea of leaving economic life to control by markets, there are other problems of a more technical nature which afflict market-based systems. In this topic we briefly review how a competitive market system could theoretically bring about an optimum solution to the problem of maximizing total welfare within the constraints of limited resources. We then look at some problems inherent in market systems which jeopardize their ability to deliver such an outcome.


  • To relate the theory of market price determination to the efficiency outcomes claimed for a competitive, free-market economic system.
  • To introduce the critique of the market model based on possible shortcomings in its allocative efficiency claims rather than the equity issues raised by its socialist critics.
  • To explore the implications of externalities, public goods, and other possible causes of market failure.

Copyright 1999 K.J. Rea