When Markets Miss the Mark

Sometimes, individual decisions have side effects—good or bad—that affect others. These are called externalities.

Negative Externalities

A negative externality is a harmful effect, like pollution from a factory that affects nearby residents.

Positive Externalities

A positive externality is a helpful effect, like someone getting vaccinated and reducing the risk for everyone else.

Public Goods

Public goods are things everyone can use, and one person’s use doesn’t reduce another’s. Examples include streetlights and national defense. These goods are often provided by the government since markets may not produce enough of them.

Real-World Fixes

Governments may tax or regulate negative externalities and subsidize positive ones to help markets work better for everyone.