Topic 9 – Market Failure and the Role of Gov’t
2. Public goods
An externality is said to occur when the action(s) of one agent affects the welfare of another agent
and this affect does not go through the price system (i.e. does not go through the market)
Externalities may be positive which means positive affects (i.e. good) or they may be negative
which means bad affects.
Externalities may exist between consumers and consumers, a firm and a consumer or firm to firm.
Furthermore, they could be going one way or both ways. (One neighbour has flowers, which
raises the valuation of your home. Or a neighbour has bees who pollenate your apple trees, which
feed the bees)
You have a neighbour who plays loud music and has a barking dog. Looking at how said
neighbour is affecting your welfare (you don’t enjoy such nonsense).The neighbour will not pay
you for pissing you off. Damn.
P Socia| Private S S priv|tS Social
Consumer part o’ tax