By the end of this chapter, you should understand:

1. what we mean by welfare economics
2. horizontal and vertical equity
3. the concept of Pareto efficiency
4. how the ‘invisible hand’ may achieve efficiency
5. the concept of market failure
6. why partial removal of distortions may be harmful
7. the problem of externalities and possible solutions
8. how monopoly power causes market failure
9. distortions from pollution and congestion
10. why missing markets create distortions