Governments in all nations regulate the way business is conducted in their countries. Government regulations may be broad in scope, such as antitrust laws that set the rules of the game that apply to all industries. Or regulations may focus on particular kinds of problems facing society, such as environmental laws and regulations designed to reduce the welfare loss. No business today can make decisions without considering the many ways that federal, state, and local governments seek to control business activities.

In this chapter we showed you why economists and policymakers believe well-functioning competitive markets can lead to economically efficient levels of production and consumption in equilibrium. Society’s well-being, as measured by the social surplus generated through trade between buyers and sellers, is maximized when markets operate in an economically efficient manner. As long as competitive market forces successfully push businesses to achieve economic efficiency, government intervention in the market can be quite limited. Under a number of circumstances, however, unregulated markets will in fact fail to achieve economic efficiency, even when the market is perfectly competitive in nature. When market failure occurs, government policymakers may be able to intervene in the market to improve matters.

This chapter examined six important reasons for market failure and suggested some ways that government policymakers may remedy these failures. We showed you that government intervention can indeed improve the social performance of business. By understanding that the legitimate purpose of government intervention in free markets is to foster economic efficiency and increase social surplus, business leaders can not only react to these regulations with better business decisions, but they can also become leaders in working with government policymakers and bureaucrats to find better ways to achieve social policy objectives at lower costs to businesses.