Market Failure and the Role of Government

A sandwich purchased at a deli

The street lighting in a city neighborhood

A lighthouse's beam guiding ships at sea

National defense provided by the government

Public library books

Prescription medications

Bottled water

Fishing grounds

It has perfect information available about its quality

It provides utility exclusively to high-income consumers

It is non-excludable but rivalrous in consumption

Its production requires large economies of scale to be efficient

Private firms enter the market and begin to exclude nonpayers from using street lights.

The market provision of street lighting increases, potentially leading to an efficient allocation of resources.

It leads to overproduction beyond the socially optimal level, creating negative externalities.

The marginal cost exceeds the marginal benefit, causing welfare loss and inefficiency.

Public goods

Private goods

Common resources

Club goods

Improperly defined property rights leading to overfishing.

Mercedes-Benz pricing ensuring consumer hunts for shortages.

High customer willingness-to-pay allowing fisheries to charge prices without loss.

A perfectly elastic demand for fish supply leading to equilibrium price.

Natural monopoly good

Public good

Common resource

Club good

Citizens receiving national defense regardless other pay taxes.

Excludability and rivalry in consumption.

Non-residents on the same street benefiting from street lights.

Non-excluded peers who also watch movies at home.

The market fails to allocate resources efficiently for public goods.

People have a preference for private goods over public goods.

Individuals have an incentive to free-ride and enjoy the benefits without contributing.

Public goods are inherently costly to produce and distribute.

Public goods are non-rivalrous, while common resources are rivalrous.

Public goods are non-excludable, while common resources are excludable.

Public goods are non-profitable, while common resources are profit-oriented.

Public goods are provided by the government, while common resources are privately owned.