A situation that occurs when (1) all activities generating more benefit than cost are undertaken, and (2) no activities are undertaken for which the cost exceeds the benefit.

Either failure to undertake an efficient action (rule one) or the undertaking of an inefficient action (rule two) will result in economic inefficiency.

(1) protecting individuals and their property against invasion by others and (2) providing goods that cannot easily be provided through private markets.

The protective function of the government involves the maintenance of a framework of security and order - an infrastructure of rules within which people can interact peacefully with one another.

Four factors that can undermine the invisible hand and reduce the efficiency of markets: (1) Lack of Competition (2) externalities (3) Public goods (4) poorly informed buyers or sellers.

Competition is vital to proper operation of the pricing mechanism; sellers prefer fewer competing sellers so they can sell higher prices.  Productive Governments will not use licenses, discriminatiory taxes, price controls, tariffs, quotas, and other restraints.  (No special interest groups)

 Property right issues cause 'spill over' which affects the well being of others. Actions imposing a cost on others and infringing on their property rights.

Costs - spillover effects of an activity that reduce the well-being of third parties

Benefit - benefits for third parties

 Goods for which rivalry among consumers is absent and exclusion of nonpaying customers is difficult.

(1) nonrival in consumption (2) nonexcludable

FR- a person who recieves the benefit of a good without paying for it.  Because it is often virtually impossible to restrict the consumption of public goods to those who pay, these goods are subject to free-rider problems

Potential Information Problems/

repeat-purchase items

 Consumer information problem is minimal if the item is purchased regularly.

RPI- an item purchased regularly by the same buyer.

Information as Profit Opportunity/

Franchise

 Information helps us make decisions

F - a right or license granted to an individual to market a company's goods or services or use its brand name.  The indivdual firms are independently owned but must meet certain conditions to continue to use the name.