Market Failure & the Role of Government
Markets are amazing... until they aren't. Capitalism was once defined as creative destruction, and it's true: in order for one person to get money, it must come from someone else. As Adam Smith had it, this leads to efficiency, but it's also possible to have some form of market failure, which can get bad. For example, it would be super-efficient if nuclear power producers just dumped their leftover nuclear waste into the nearest stream or tributary, but then we'd all die tomorrow from hardcore radiation. Or, perhaps worse, we could end up like Kevin Costner (not just the Costner from Waterworld; being Costner in anything is the moral equivalent of dying tomorrow from hardcore radiation).
You should note that if you do start to notice gills behind your ears, it's probably too late to prevent you from appearing in the remake of the second-worst movie of all time (Twilight). Market failures happen for many reasons, but one of the most common forms of market failure is externality, such as the aforementioned pollution, or when too many farmers use too much water, leaving none to water their crops the next year, etc. There are positive externalities, too, but these aren't nearly as exciting (public education, anyone?). |
One thing that most communities in the United States decide it is worth their tax dollars to invest in is public schools. As such, this is one of the most common positive externalities one will find.
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Public Goods are goods provided to all members of society without profit by anyone, such as air that we breathe. Thus, there's moral hazard involved: it would be very easy for public goods to be overused. No one makes a profit on selling air, so why should anyone have a motive to protect the air that we breathe? It's not like it's going to cost an individual money if he just starts burning chlorofluorocarbons or whatever it is that puts holes in the ozone.
Protecting public goods, then, often becomes the domain of governments, with mixed results. |