Market failures and efficiency in the principles course

Many policy debates revolve around the appropriate extent and form of gov-ernment intervention in specific markets, or, more accurately, government alter-ation of the incentives or institutional rules in those markets, including the pro-vision of certain goods.1 To make sense of these debates, economics students must understand what “free ” markets do well and, in particular, where they fail, and how governments may be able to improve their behavior. Toward this end, authors of principles textbooks generally discuss concepts including gains from trade, efficiency, the invisible hand, and various causes of market failures such as market power, externalities, and public goods. The current pedagogy fails to emphasize fully the common principles under-lying the various categories of market failure. The examination of principles text-books below demonstrates that each category of market failure is typically dis-cussed separately. Furthermore, the textbooks do not always clearly show how an economist identifies the alternative, preferred outcome, nor do they emphasize that economists often apply an efficiency criterion in considering alternatives