.. In introductory economics classes, students learn about several types of "market failure," which occurs when some attributes of the market prevent it from producing an efficient outcome ..
Externalities, public goods, asymmetric information, and market power provide necessary—but insufficient—conditions for intervention to be justified. ..
.. the mere existence of a negative externality does not ipso facto mean that government can improve on the market. Note that externality problems are market "failures" only in comparison to the perfectly competitive model's equilibrium. In other words, the "failure" here is not that markets "do not work" in practice, but that they fail to live up to a blackboard ideal. As it turns out, by that criterion, markets "fail" all the time!
.. Implicit in negative-externality arguments for intervention is the claim that the political process will actually do what economists say it should do. ..
.. those who use "negative externalities" as a justification for government action must show two things: first, that the supposed market failure cannot be corrected either through entrepreneurship or by changes in the rules of the game (e.g., more clearly defining property rights to solve the negative externalities associated with a commons6); and second, that the government-imposed solution is both consistent with political incentives and superior to the imperfect market outcome. Unfortunately, people who argue for government intervention to correct externalities rarely carry out this second step. Even more unfortunately, economists rarely carry out this second step.
People make some obvious mistakes when discussing public goods. The most common one is to take the word "public" in "public good" to mean "provided by government."
.. Pointing out imperfections in the market does not ipso facto justify government intervention, and the only certain way that market "failures" are "failures" is by comparison to an unreachable theoretical idea. Market imperfections are not magic wands that make market solutions and government imperfections disappear. Real understanding of comparative political economy begins rather than ends with the recognition that markets are not always perfect.