Market Failure

Market failure arguments lie at the root of a number of arguments supporting government intervention in the economy. A claim of market failure, by its nature, suggests some reason that voluntary, private institutions cannot produce valuable goods and services to the appropriate extent. These arguments fall into several categories, but most commonly center on the issues of public goods and externalities. Sometimes the phrase “collective action problems” serves as a more general rubric for what are perceived as failures of the market to deal with specific issues.

There are two aspects to the problem of public goods. The first, “nonrivalry,” suggests that an additional person can consume a good without infringing on the consumption of others. For instance, if a movie theater is not full, another ...