Question

Explain why the existence of negative externalities and public good causes market failure and use an appropriate example.

Answer 1

Public goods are created and regulated by the state. Negative externalities are eliminated through government regulation as well. This leads to the distortion of information (prices, quantity of necessary goods) on the market, i.e. leads to market failure. For example, the creation of a public good - street lighting - leads to a distortion of market prices for electricity, since it increases the demand for electricity, but all residents of the city pay for it, and not just those who use it at night and evening.