Syllabus T. Y. B. A. Paper : IV advanced economic theory with effect from academic year 2010-11 in idol

GOVERNMENT INTERVENTION 
Markets play such a central role in our economy. Under ideal 
conditions, they ensure that the economy is Pareto efficient but 
there is often dissatisfaction with market. There are six important 
conditions under which market fails to allocate resources efficiently. 
Failure of competition, public goods, externalities, incomplete 
markets, imperfect information and unemployment and other 
macroeconomics disturbances are the reason why market fails to 
have an efficient, market. And this refer to market failure, each type 
of market failures provides a rationale for government activities. 
Property, Rights and Contract Enforcement: 
For market to work there is a need for government to define 
property rights and enforce contracts. One of the most fundamental 
requirements of a capitalist economic system is a strong system 
of property rights. The fundamental purpose of property rights 
and their fundamental accomplishment is that they eliminate 
destructive competition for control of economic resources well 
defined and well protected property rights replace competition by 
violence with competition by peaceful means. If the property rights 
are well defined people would have sufficient incentive maintain 
and improve their resources. If individuals are to engage in 
transaction with each other the contract may sign must be 
enforced. Unless each contract is enforced no one would be willing 
to make a transaction. 
Government activities aimed at protecting citizens and 
property as forcing contracts and defining property rights can be 

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thought of as providing the foundations on which all markets 
economies rest. 
14.2.1 Market Failure and Role of Government : 
 
1. Failure of competition: 
For market to result in Pareto efficiency there must be 
perfect competition there must be a large number of firms that each 
believes that it has no effect on price some firms that have market 
power, the ability to affect price, then allocation resources will 
generally be inefficient.
In some industries, there are relatively few firms, one or to 
firms have the large share of the market. When a single firm 
supplies the market, we refer it as monopoly. When a few firms 
supply the market, we refer it as oligopoly. And even when there 
are many firms each may produce a slightly different good and may 
thus perceive itself facing a downward-sloping demand curve. We 
refer this situation as monopolistic competition. 
There are varieties of reasons why competition may be 
limited. Sometimes there a natural monopoly, it is a situation 
where it is cheaper for a single firm to produce the entire output 
than for each of several firms to part of it. 
Under Pareto efficient level, they set prices equal to the 
marginal cost of production. With competition, marginal benefits 
equal cost. On the other side under imperfect competition, marginal 
revenue equal to the marginal cost. With a downward slopping 
demand curve, the marginal revenue has two components. When a 
firm sells an extra unit, it receives the price of the unit but to sell the 
extra unit, it must lower the price it charges on that and all previous 
units 
– demand curve unit is its price minus the revenue forgone 
because the expansion in sales lowers the price in all units. Thus, 
marginal revenue is less than price.