[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

goods also have the property of nonexcludability—that is, it costs a great deal to
exclude any individual from enjoying the benefits of a public good. The standard
example of a public good is national defense. Once the United States is protected
from attack, it costs nothing extra to protect each new baby from foreign invasion.
Furthermore, it would be virtually impossible to exclude a newborn from the
benefits of this protection.
Imperfect competition, imperfect information, externalities, and public goods all
represent cases in which the market does not produce economic efficiency. Economists
refer to these problems as market failures and have studied them closely. The market
“fails” not by ceasing to exist but by failing to produce efficient outcomes. Government
may be able to correct such a market failure and improve economic efficiency. But
before considering government policies to correct these failures, we first need to
understand clearly how it is that market outcomes may be inefficient.
Though it describes an oversimplified world, the basic competitive model continues
to provide important and powerful insights. For that reason, most economists
use it as the starting point for building a richer, more complete model of the
modern economy. This richer model is the focus of Part Three. In the next several
chapters, we will examine how adding the complications of imperfect competition,
imperfect information, externalities, and public goods to the basic model increases
the ability of economics to explain our economy.
Fundamentals of Imperfect Markets 1
IMPERFECT MARKETS LEAD TO MARKET
FAILURES
When the market is perfectly competitive, consumers and firms have perfect information,
and there are no externalities (positive or negative) and no public goods, market
outcomes will be efficient. When these conditions do not hold, markets are inefficient
and there can be a role for government policies that lead to more efficient outcomes.
Imperfect Competition and
Market Structure
When economists look at markets, they look first at the market structure—that
is, how the market is organized. The market structure that formed the basis of the
competitive model of Part Two is called perfect competition. For example, there
are so many wheat farmers (producers) that no individual farmer can realistically
hope to move the price of wheat from that produced by the law of supply and demand.
Frequently, however, competition is not “perfect” but limited. Economists group
markets in which competition is limited into three broad categories. In the most
extreme case, there is no competition: a single firm supplies the entire market. This
242 ∂ CHAPTER 11 INTRODUCTION TO IMPERFECT MARKETS