Externalities, merit & public goods

So far the market has looked like a hero — the price mechanism guiding scarce resources to where they are valued most. In this lesson we meet its failures. When decisions spill costs or benefits onto third parties, when goods cannot be sold at all, or when consumers simply do not know their true worth, the market left alone gets the quantity wrong. We define market failure precisely, draw the externality diagram that shows over- and under-provision, and then weigh the government's toolkit for putting it right — tax, subsidy, provision, regulation and information — together with the limits of each.