Editing Market failure (section)

===Externalities===
A good or service could also have significant [[Externality|externalities]],<ref name="Laffont" /><ref name="demartino01" /> where gains or losses associated with the product, production or consumption of a product, differ from the private [[cost]]. These gains or losses are imposed on a third-party that did not take part in the original market transaction. These externalities can be innate to the methods of production or other conditions important to the market.<ref name="krugman" />

"The Problem of Social Cost" illuminates a different path towards social optimum showing the [[Pigouvian tax]] is not the only way towards solving externalities. It is hard to say who discovered externalities first since many classical economists saw the importance of education or a lighthouse, but it was Alfred Marshall who wanted to explore this more. He wondered why long-run supply curve under perfect competition could be decreasing so he founded "external economies" (<ref>Sandmo 228</ref><ref>{{cite book |last1=Sandmo |first1=Agnar |title=Economics evolving : a history of economic thought |date=2011 |publisher=Princeton University Press |location=Princeton, N.J. |isbn=9780691148427 |pages=228 }}228</ref>). Externalities can be positive or negative depending on how a good/service is produced or what the good/service provides to the public. Positive externalities tend to be goods like vaccines, schools, or advancement of technology. They usually provide the public with a positive gain. Negative externalities would be like noise or air pollution. Coase shows this with his example of the case ''Sturges v. Bridgman'' involving a confectioner and doctor. The confectioner had lived there many years and soon the doctor several years into residency decides to build a consulting room; it is right by the confectioner's kitchen which releases vibrations from his grinding of pestle and mortar (<ref>The Problem of Social Cost 8</ref><ref>{{cite book |last1=Coase |first1=Ronald |title=The Problem of Social Cost |date=1960 |publisher=The University of Chicago Press |location=Chicago |isbn=9781539433408 |pages=8 }}</ref> ). The doctor wins the case by a claim of nuisance so the confectioner would have to cease from using his machine. Coase argues there could have been bargains instead the confectioner could have paid the doctor to continue the source of income from using the machine hopefully it is more than what the Doctor is losing (<ref>The Problem of Social Cost 9</ref><ref>{{cite book |last1=Coase |first1=Ronald |title=The Problem of Social Cost |date=1960 |publisher=The University of Chicago Press |location=Chicago |isbn=9781539433408 |pages=9 }}</ref> ). Vice versa the doctor could have paid the confectioner to cease production since he is prohibiting a source of income from the confectioner. Coase used a few more examples similar in scope dealing with social cost of an externality and the possible resolutions.

[[File:6th Avenue from 49th.jpg|thumb|300px|Congested [[Avenue of the Americas]] in [[Midtown Manhattan|Midtown]] [[Manhattan]], [[New York City]], which leads the world in urban automobile traffic congestion,<ref name=NYCCongestion>{{cite web|url=https://www.economist.com/united-states/2024/11/21/congestion-pricing-in-new-york-gets-the-go-ahead-after-all-maybe|title=Congestion pricing in New York gets the go-ahead after all. Maybe|publisher=The Economist|date=November 21, 2024|access-date=November 21, 2024|quote=But traffic is bad most days, with more than 900,000 cars entering Manhattan’s central business district. INRIX, a traffic-data firm, found that New York City leads the world in urban traffic congestion among the cities scored, with the average driver stationary for 101 hours a year.}}</ref> but which has implemented [[Congestion pricing in New York City|congestion pricing]] in January 2025 to address the gridlock]]
[[Traffic congestion]] is an example of market failure that incorporates both non-excludability and externality. Public roads are common resources that are available for the entire population's use (non-excludable), and act as a [[Complementary good|complement]] to cars (the more roads there are, the more useful cars become). Because there is very low cost but high benefit to individual drivers in using the roads, the roads become congested, decreasing their usefulness to society. Furthermore, driving can impose [[hidden costs]] on society through pollution (externality). Solutions for this include [[public transport]]ation, [[congestion pricing]], tolls, and other ways of making the driver include the [[social cost]] in the decision to drive.<ref name="krugman" />

Perhaps the best example of the inefficiency associated with common/public goods and externalities is the environmental harm caused by [[pollution]] and [[overexploitation]] of [[natural resource]]s.<ref name="krugman" />

====Coase theorem====
The [[Coase theorem]], developed by [[Ronald Coase]] and labeled as such by George Stigler, states that private transactions are efficient as long as property rights exist, only a small number of parties are involved, and transactions costs are low. Additionally, this efficiency will take place regardless of who owns the property rights. This theory comes from a section of Coase's Nobel prize-winning work ''[[The Problem of Social Cost]]''. While the assumptions of low transactions costs and a small number of parties involved may not always be applicable in real-world markets, Coase's work changed the long-held belief that the owner of [[property rights]] was a major determining factor in whether or not a market would fail.<ref>Michael Parkin (2008). ''Microeconomics'', 9th Ed. p. 379. University of Western Ontario.</ref> The Coase theorem points out when one would expect the market to function properly even when there are externalities.

<blockquote>A market is an institution in which individuals or firms exchange not just commodities, but the ''rights'' to use them in particular ways for particular amounts of time. [...] Markets are institutions which organize the ''exchange of control'' of commodities, where the nature of the control is defined by the property rights attached to the commodities.<ref name="rees"/></blockquote>

As a result, agents' control over the uses of their goods and services can be imperfect, because the system of rights which defines that control is incomplete.  Typically, this falls into two generalized rights – ''excludability'' and ''transferability''.  Excludability deals with the ability of agents to control who uses their commodity, and for how long – and the related costs associated with doing so.  Transferability reflects the right of agents to transfer the rights of use from one agent to another, for instance by selling or [[leasing]] a commodity, and the costs associated with doing so.  If a given system of rights does not fully guarantee these at minimal (or no) cost, then the resulting distribution can be inefficient.<ref name="rees"/> Considerations such as these form an important part of the work of [[institutional economics]].<ref name="bowles">{{cite book | last = Bowles  | first = Samuel | title = Microeconomics: Behavior, Institutions, and Evolution | publisher = Russel Sage Foundation
  | year = 2004  | location = United States}}</ref> Nonetheless, views still differ on whether something displaying these attributes is meaningful without the information provided by the market price system.<ref>Machan, R. Tibor, [http://media.hoover.org/documents/0817929428_xi.pdf ''Some Skeptical Reflections on Research and Development''], Hoover Press</ref>