Market Failure

Goods that are under-consumed if left to the market, often with positive externalities, like education or healthcare.

Indirect taxes imposed to internalize negative externalities, aligning private and social costs.

Costs imposed on third parties by consumption, such as secondhand smoke from cigarettes.

They reduce the cost of producing or consuming merit goods, increasing their use.

Allocative efficiency, where social/community surplus is maximized.

Goods that are over-consumed if left to the market, often with negative externalities, like alcohol or cigarettes.

Emissions limits for factories and bans on plastic bags.

They coordinate global responses to sustainability challenges, e.g., the Paris Climate Accord.

Measurement difficulties, effectiveness concerns, and stakeholder conflicts.

When communities manage resources collectively without external regulation.

A resource that is rivalrous but non-excludable, like fisheries or forests.

The output where marginal social benefit (MSB) equals marginal social cost (MSC), achieving allocative efficiency.

Goods that are non-rivalrous and non-excludable, like street lighting or national defense.

They increase the cost of emitting CO₂, discouraging pollution and internalizing the external cost.

Market-based instruments that cap total pollution and allow firms to trade emission rights.

Through direct provision or contracting private firms to supply them.

The overuse and depletion of common resources due to individual incentives.

Benefits to third parties from the production of a good, such as improved public health from vaccine production.

A diagram with marginal private cost (MPC) lower than marginal social cost (MSC), showing overproduction.