Market Failure Situations where individual rationality does not produce group rationality Polluting when the damage is more than the cost of preventing it Two prisoners confessing when both would be better off if neither did Voters being rationally ignorant of what they need to know to choose the better candidate All forms of market failure can probably be viewed as externality problems I take actions some of whose costs or benefits go to others And I ignore those costs or benefits in deciding what actions to take But some forms are easier to think of in other terms The public good problem Adverse selection:The market for lemons Market Failure • Situations where individual rationality does not produce group rationality • Polluting when the damage is more than the cost of preventing it • Two prisoners confessing when both would be better off if neither did • Voters being rationally ignorant of what they need to know to choose the better candidate • All forms of market failure can probably be viewed as externality problems • I take actions some of whose costs or benefits go to others • And I ignore those costs or benefits in deciding what actions to take • But some forms are easier to think of in other terms • The public good problem • Adverse selection: The market for lemons