Chapter 4: Introduction

Market Failures: Public Goods and Externalities

In this chapter, you will learn to:

  • explain the origin of both consumer surplus and producer surplus and how they measure how well off consumers and producers are in the market
  • explain how properly functioning markets maximize the sum of consumer and producer surplus, and how this condition is necessary for efficient markets
  • describe free riding and public goods, and illustrate why private firms cannot normally produce public goods
  • explain how positive and negative externalities cause under- and overallocations of resources


Can you imagine a world in which you did not own a cellular phone or use Wikipedia? New technology changes how people live and work and what they buy. Technology includes the invention of new products, new ways of producing goods and services, and even new ways of managing a company more efficiently. Research and development of technology is the difference between horses and automobiles, between candles and electric lights, between fetching water in buckets and indoor plumbing, and between infection and good health from antibiotics. In December 2009, ABC News compiled a list of some of the technological breakthroughs that have revolutionized consumer products in the past 10 years:

  • GPS tracking devices, originally developed by the defense department and available to consumers in 2000, give users up-to-date information on location and time through satellite technology.
  • In 2000, Toyota introduced the Prius hybrid car, which greatly improved fuel efficiency.
  • Also in 2000, AT&T offered its customers the ability to text on a mobile phone.
  • In 2001, Wikipedia launched a user-generated encyclopedia on the Web.
  • Even though Napster died in 2001, the company launched music downloading and file sharing, which revolutionized how consumers obtain their music and videos.
  • Friendster kicked off the social networking business in 2003, and Twitter and Facebook followed.
  • In 2003, international scientists completed the Human Genome Project. It helps to fight disease and launch new pharmaceutical innovations.
  • Also in 2003, the search engine became a way of life for obtaining information quickly. The search engine companies also became innovators in the digital software that dominates mobile devices.
  • In 2006, Nintendo launched the Wii and changed the way we play video games. Players can now be drawn into the action and use their bodies to respond rather than a handheld device.
  • Apple introduced the iPhone in 2007 and launched an entire smartphone industry. In 2015, cell phones now recognize human voices via artificial intelligence.

With all new technologies, however, there are new challenges. This chapter deals with some of these issues: Will private companies be willing to invest in new technology? In what ways does new technology have positive externalities? What motivates inventors? Does the government have a role to play in encouraging research and technology? Are there certain types of goods that markets fail to provide efficiently, and that only the government can produce? What happens when the consumption or production of a product creates positive externalities? Why is it unsurprising when we overuse a common resource, like marine fisheries?


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Agribusiness Management 101 Copyright © by William Rossman is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

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