Market Failure and the Role of Government

12%-18% of AP Test

The private market FAILS to produce the socially optimal quantity

Marginal social benefit > marginal social cost

Positive externalities (too little)-a party EXTERNAL to the transaction  can benefit.  Examples:  Education & immunizations.
Other terms for positive externality-spillover benefits, external benefits and underallocation.

Correct the externality--Subsidize the consumer and/or the producer.

Positive Externalities

Negative externalities (too much)-a party EXTERNAL to the the transaction it negatively impacted or incurs a cost.  Example: pollution.
Other terms for negative externality-spillover costs, external costs and overallocation.

Correct the negative externality--Tax, regulate, or cap and trade the consumer and/or the producer.

Negative Externalities

Public goods
Public versus private goods
Provision of public goods

Public policy to promote competition
Antitrust policy

Income distribution
 Sources of income inequality