Market Failures, Government Solutions, and Moral Perceptions

It should be obvious to even the casual observer that both markets and governments fail—neither comes close to achieving perfection. Externalities, both positive and negative, are the most common explanation for market failures. The undersupply of public goods, for example, is seen as a market failure, and is the direct result of a positive externality being generated when a person contributes to a public good which, by definition, benefits others whether they contribute or not. Similarly, excess pollution is seen as a market failure resulting from the negative externality of people imposing uncompensated costs on others by emitting pollutants into the environment. But externalities are just as commonly the result of government activity as they are market activity. For example, many government transfers are best seen as negative externalities motivated by the desire of politically influential groups to benefit at the expense of others. Yet when problems that capture public notice arise, the default response is almost always expanding government power to correct what are depicted as market failures. This is true even when the problem is largely caused by government policies (as in the case of the Great Recession) or entirely by government policies (as in the case of restricted competition in public education, K–12). Indeed, market failure is often used to justify government corrections when