Externalities and market failures result from:

Externalities and market failures are the situations in which participants in a market transaction do not consider all of the costs or benefits to parties other than themselves. They can be caused by a variety of factors such as incomplete information, inadequate regulatory framework, or public good externalities. Incomplete information occurs when either buyers or sellers hold information that affects their decision making, but the other party does not have the same information. This can cause an inefficient outcome, as an unseen benefit to one party may be overlooked, or the other party may not pay a fair price for what they are buying. Inadequate regulatory framework occurs when government regulations fail to set a balance between private and public interests. Without proper oversight, private interests may take advantage of market imperfections to their own benefit. Public good externalities occur when an individual’s actions have an effect on others who are not part of the transaction. An environmental externality, for example, could be the pollution generated from one person’s factory affecting the public’s health. In this case, the cost of the pollution would not be incorporated into the price of the factory’s product.