Give an example of a policy evaluation method used to assess market-failure interventions.

• A. Cost-benefit analysis comparing net social benefits; or estimating deadweight loss and distributional impacts
• B. Guessing outcomes without data
• C. Relying on producer profits only
• D. Anecdotal stories

Answer: (A)

When evaluating interventions to fix market failures, cost-benefit analysis is the standard approach. It compares the total benefits the policy generates with the total costs, converting all effects into a common metric to see whether net social benefits are positive. This method captures externalities and other indirect effects, helps quantify deadweight loss from the inefficiencies the market failure created, and considers how the policy affects different groups’ welfare, not just producer profits. That combination—measuring net social benefits and incorporating deadweight loss and distributional impacts—is what makes this approach the most informative and reliable for judging whether a policy truly improves overall welfare. By contrast, guessing outcomes without data, focusing only on producer profits, or relying on anecdotal stories fail to provide a rigorous, comprehensive view of a policy’s social impact.