How did Neoclassical economists rationalize a policy of laissez faire with respect to the potential intervention into a market economy by government? Why do modern economists, on the other hand, acknowledge a role for government?
A well-structured answer will include:
1. Pareto’s definition of economic efficiency.
2. A definition of market externalities.
3. An observation that Neoclassical economists correctly observed that a system of competitive markets will achieve economic efficiency in the absence of externalities.
4. An observation that unfettered market equilibrium prices with produce too much of a good or service if an externality like pollution results.