Markets may not always be efficient due to externalities and public goods from "summary" of Economics for Beginners by Andy Prentice,Lara Bryan
When we talk about markets, we often assume that they work perfectly, with prices reflecting the true value of goods and services. However, this is not always the case. Externalities and public goods are two reasons why markets may not be as efficient as we think. Externalities are the unintended side effects of economic activities that affect third parties who are not involved in the transaction. For example, pollution from a factory may harm the health of nearby residents, but the factory owner does not take this cost into account when deciding how much to produce. As a result, the market may produce too much of the good, leading to negative consequences for society as a whole. Public goods are goods and services that are non-excludable and non-rivalrous, meaning that once they are provided, everyone can benefit from them, and one person's consumption does not reduce the amount available to others. This creates a free-rider problem, where individuals have an incentive to consume the good without paying for it. As a result, the market may under-produce public goods, such as national defense or clean air, because individuals do not have an incentive to pay for them. In both cases, externalities and public goods lead to market failures, where the allocation of resources is not efficient and does not maximize societal welfare. In the presence of externalities, the market fails to take into account the full costs or benefits of production or consumption, leading to overproduction or underproduction of goods. In the case of public goods, the market fails to provide the optimal level of the good because individuals do not have an incentive to pay for it. To address these market failures, governments may intervene by imposing taxes or subsidies to internalize externalities or by providing public goods directly. By doing so, governments can ensure that resources are allocated efficiently and that society as a whole benefits from the production and consumption of goods and services.
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