Market Failure Due to Public Goods and Externalities

Abstract

We have studied some characteristics and operations of the firm in perfect and imperfect competition. The fundamental assumptions were of perfect information to buyers and sellers, absence of transaction costs, absence of externalities, infinite number of buyers and sellers each buying and selling so small a proportion of the total product that prices and quantities cannot be influenced by the action of anyone of these agents. While the study of perfectly competitive market system is important to lay down the foundation of a scientific approach to economic theory. Perfectly competitive firms are not to be found in the real economic world, as the imperfections of the social and economic environment disrupt many of the optimality conditions. The imperfections of the social and economic environment give rise to market failure. We are now led to study of pricing and output determination conditions associated with such market failure.