What theoretically justifies public policy to influence market allocations?

The primary justification for public policy to influence market allocations is the concept of externalities. An externality occurs when the actions of one individual or entity create an unintentional consequence on others in the form of either a cost or a benefit. For example, a factory releasing air pollution affects the health of nearby residents, who did not participate in the decision to open the factory. This cost to people not involved in the decision to open the factory is considered an externality. Public policy can be used to better account for the costs of externalities, providing incentives for people to consider their actions from a broader perspective. By doing this, the government can potentially help achieve more efficient and socially optimal outcomes that may not be achievable in a free market. This can also correct for negative externalities that potentially would have been left unaccounted for in a free market.