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The sources of market failure are. Market Failures, Market Fiasco

Main reasons for market failure, external and internal features

The market is a system that functions effectively when the task of ensuring the organization of trade on mutually beneficial terms is fully realized. An ideal market is obliged to make any exchange possible if it is beneficial for both parties. When the market is unable to perform its function, the concept of market failure arises, with limited resources being allocated inappropriately. Typically, market failures include insufficient competition, and scholars also include externalities and public goods in this category.

Current theory of market failure and externalities

Experts say that market failures can be attributed to externalities. At the same time, the market is not able to adequately transmit information about price. Pricing policy must reflect the objective cost of production of goods and services. The buying and selling process involves the manufacturer and the client. If their actions begin to influence third parties not involved in the trading process, then we are talking about such types of market failure as externalities. For example, environmental pollution.

What are the consequences of market failure: public goods and market fiasco

Goods and services have two main characteristics. Firstly, this is the exclusion property. That is, the manufacturer offers its product to some people, but not to others. The second property is rivalry. If a unit is used by one person, then another cannot use it. Such features are usually considered in the presence or absence of competition. If a product does not have the properties of exclusion and competition, then it is called a public good. These include, for example, police work, the space program, maintaining the streets of populated areas and much more. It is known that types of market failures include public goods.

Insufficient competition and the main types of market failures in the economy

Market failure also includes insufficient competition. Market prices should reflect opportunity costs. If harmful external effects begin to appear, prices fall below alternative prices. When competition is not high enough, prices begin to rise unjustifiably, which can lead to a market fiasco. Among the reasons for market failure, this is probably one of the main ones. A similar scheme is typical for monopoly markets, when the consumer begins to receive a false signal about the price. Further they can economically unjustified substitutions will follow. Such situations greatly undermine the market for goods and services and introduce instability.

What other market failures can you name?

Market failures also include inflation and unemployment. In these cases, the actions of sellers and buyers become uncoordinated. It should be noted that market failures do not include equal distribution of income, regulation of pricing, or adoption of antitrust legislation. The government can resolve market failures. To achieve this, laws are passed that require the use of equipment that controls the level of environmental pollution. Taxes may also be imposed to reflect the damage caused by the harmful externalities of production. The property rights of owners are clarified in order to protect nature from pollution. Of course, market failure is a very important economic problem that requires finding new solutions.

World experience testifies to the important role of the state in managing socio-economic processes. The modern economy is a “mixed” economy based on market principles for organizing economic life (private property, freedom of entrepreneurial initiative, market methods of distributing limited resources) with the active regulatory influence of the state on the behavior of economic entities.

The need for state regulation of economic processes is due to the inability of the market, through self-regulation, to solve a number of problems that undermine the foundations of the market economic system and reduce its efficiency. In conditions of market competition, so-called "market failures"- situations where an economy based on private property and free enterprise does not ensure efficient use of resources and dynamic development.

Traditionally, market failures include:

Monopoly;

Lack and asymmetry of information;

External effects (externalities);

Production of public goods.

Monopoly, which makes it difficult for other economic entities to enter the market, as well as distorting the market pricing mechanism, is a phenomenon that violates the foundations of the market and the principles of free competition.

In these conditions, the state, through its activities, must ensure conditions for free competition and carry out antimonopoly regulation.

As a rule, it is monopolies that inflate prices for goods and services, and the state is forced to make appropriate adjustments to the prices they set. In some cases, for certain socially significant goods and services, the state acts as a price regulator, including those set by non-monopolists, regulating the value of the trade markup or establishing taxation for these goods at a preferential rate.

In market conditions, economic agents act in conditions imperfect(asymmetrical and incomplete) information. This creates inefficiency in market transactions.

Lack of information may block interaction between market participants. The result is incompleteness of markets, manifested primarily in the financial sector. Securities and futures markets, as part of the capital market, are generally not comprehensive or complete. It is extremely difficult to predict long-term changes in them. Moreover, financial markets operate relatively independently from the markets for consumer goods, labor, land and physical capital. All this leads to the fact that most transactions are carried out in conditions of uncertainty.

Typically, the state is unable to completely overcome the problem of incomplete information. But it can partially mitigate the risks of decisions by distributing them among taxpayers, which is not available to private investors. The state can finance long-term investment projects or act as a guarantor for their implementation, introduce compulsory deposit insurance by banking institutions, and take other actions that can increase the efficiency of public use of resources.

Information asymmetry manifests itself in many areas of economic activity. Thus, a classic example is healthcare and medical care. When a patient consults a doctor, he relies on him to make a diagnosis and choose treatment methods. The consumer of medical services has no ability to control the manufacturer. If manufacturers were guided solely by the principles of personal gain, then expensive and ineffective medical care would become widespread.

A similar situation is equally possible in the field of education. Here the consumer is forced to choose a manufacturer before the actual service is provided. Payment for services is carried out on the basis of an insufficiently accurate estimate, which is based on assumptions based on existing experience. Information asymmetry also occurs during hiring; The employer obviously knows the capabilities of the job seeker less well than the potential employee himself.

The problem of information asymmetry can be solved without the participation of the state, based on reputation accounting. However, in difficult situations, government intervention, which can take various forms, is more productive. One of them is licensing, which is a prerequisite for the implementation of certain types of activities, for example, in healthcare, in the provision of educational services, in the production of medications, etc. It's also possible direct state participation in the production of goods and services that are associated with significant information asymmetry. Finally, various tools can be used to prevent information asymmetry or block its consequences. state control over production and sales of relevant goods and services.

The obvious market failure is external effects (externalities)– costs or benefits associated with a specific type of activity that are not reflected in prices. They are called external because they concern not only participants in a specific market transaction, but also third parties.

Distinguish negative And positive externalities. Market self-regulation does not eliminate negative “externalities”, i.e. negative impact of the activities of some business entities on others. An example here is environmental pollution, which brings economic losses to the entire society (river and air pollution). In this case, through administrative fines or additional taxation, the state forces producers to avoid such effects for other market participants.

With positive externalities, the activities of some economic agents bring certain benefits to outsiders. Thus, if a person has been vaccinated against an infectious disease, the risk of infection is reduced not only for him personally, but also for those who come into contact with him. In this case, marginal social benefits are greater than marginal private benefits. Another example of achieving a positive externality is the development of education, as a result of which not only individuals, but also society as a whole benefit. If the areas that generate positive externalities were developed solely on the basis of free market principles, there would be an underproduction of the corresponding goods compared to the efficient level.

Benefits that generate positive externalities are created mainly in the areas of education, healthcare and culture. These socially significant benefits have a positive impact on society as a whole, therefore government support for their consumers and producers by providing tax benefits and subsidies is justified.

The limiting case of activity generating positive externalities is represented by creation of public goods. These are goods produced at the expense of society and consumed by all members of society. They are distinguished by two properties: non-rivalry and non-excludability in consumption.

Non-rivalry means that the good is available to many consumers at the same time, and the marginal cost of providing it to an individual consumer is zero. Under non-excludability in consumption implies technical impossibility or prohibitive high costs of preventing access to the good for new consumers. Goods that have both of these properties are called purely public goods. If at least one of these properties is not fully manifested, there is mixed public good.

Examples of purely public goods include national defense, law enforcement, and legislation. Thus, an increase in population does not require additional changes to the civil, family or administrative code. Laws define the rights and responsibilities of everyone, and the amount of “benefits” received does not depend on the number of “consumers”. At the same time, not a single resident of the country can be excluded from the scope of the legislation, since it is simultaneously addressed to all members of society.

Purely public goods cannot be produced and sold in parts; their production and consumption occurs collectively.

The state is called upon to correct market flaws. Currently, mechanisms for correcting the market mechanism have been developed, tested in various countries. These include measures to maintain macroeconomic balance, while the very concept of “equilibrium” extends not only to economic, but also to social elements, primarily the system of social guarantees for citizens. The main debate is about the scope of such regulation.

Market failures: in the case of market power when there are externalities in the production of public goods in the case of asymmetric information. Ways to solve problems of externalities: Internalization of externalities. a For example, if, to eliminate negative external effects, the state introduces a deterrent tax in the amount of marginal external costs, then the producer’s internal costs will increase and bring the output volume into line with the socially optimal one.

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Ticket 19, 27

Failures or market fiasco. Externalities and the market.

Failures, or fiascos, of the marketThese are cases where inefficient distribution (or allocation) of resources occurs. The market fails = the price does not reflect all costs, or the market fails to produce any goods.

Market failures:

in case of market power
in the presence of external effects
in the production of public goods
in case of asymmetric information.

External effects (externalities)these are the costs or benefits of the production or consumption of any goods for third parties not participating in the transaction.

Externalities disrupt the functioning of the market mechanism.

Conditions for achieving a socially efficient output volume:

MSU = MSC,

where MSU marginal social utility,

and M.S.C. marginal social costs.

Negative externalities generate overproduction in a competitive market, and positive externalities generate underproduction.

Ways to solve externality problems:

Internalization of externalities. When i-i, external effects become internal.

a) For example, ifto eliminate negativeexternal effects, the state introduces a deterrent tax in the amount of marginal external costs, then the producer’s internal costs will increase and bring the output volume into line with the socially optimal one.

b) To internalize positiveexternalities, the government uses incentive subsidies.

Coase theorem

If property rights to resources are clearly defined and respected, including the possibility of free exchange of these rights, then the market will be able to resolve the problem of externalities on its own, without the participation of the state, through the purchase and sale of these rights.

Public goodsthese are indivisible benefits of collective use.

Properties of public goods:

non-excludability from consumption (the very nature of a pure public good is such that it is impossible to separate payers from non-payers);
non-competitiveness in consumption (an increase in the number of consumers does not reduce the utility of a given good for others, therefore, the marginal cost of provision = 0).

Those public goods and services that fully meet these properties are calledpure public goods.

Free rider problem- free use of a good for which one should pay. The market is not designed to solve the problem of unemployment, because... does not have mechanisms that can separate the payer from the defaulter.

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Plan.

Market failures.

Lecture abstract.

Thus ,

The market is developing, becoming more complex, and different approaches to understanding it are emerging. They are widely represented in the economic literature. Let us choose the following definition of the market:

A market is a system of economic relations between sellers and buyers, based on the purchase and sale of goods, services and money.

The essence of the market is most fully revealed through its functions:

Informational.
Regulatory.
Stimulating.
Controlling.
Pricing
Differentiating.

The market is a great achievement of human civilization, but at the same time it also has disadvantages.

Positive features of the market:

Flexibility and high adaptability to changing conditions.
Prompt use of new technologies to reduce costs.
Independence of producers and consumers in decision making.
Ability to meet needs in required quantity and high quality.

Approaches to classifying market types. Market infrastructure.

The market has a certain structure - the internal structure of individual elements of the market. Market structure is classified according to various criteria, the most important of which are the following:

By economic purpose distinguish the market for goods and services, the market for means of production, the labor market, the securities market, the money market, etc.
By geographical location distinguish between local, regional, national and global markets.
According to the degree of restriction of competition: free competition market, pure monopoly market, oligopoly market, monopolistic competition market.
By industry: automobile, grain, etc.
By nature of sales: wholesale, retail.
From point of view compliance with the law: legal market (complying with the law) and shadow market (not complying).
There is also a difference between a sellers' market and a buyers' market.

Market infrastructure.

Market infrastructure is a set of institutions that ensure the successful functioning of the market. Infrastructure performs very important functions: it facilitates the meeting of sellers and buyers, facilitates transactions, and allows the state and society to control the market.

It is necessary to distinguish between the infrastructure of the commodity and financial markets and the labor market.

Elements of market infrastructure: commodity exchange, stock exchange, labor exchange, banks, tax services, etc.

Exchange– a market for the wholesale trade of standard goods or a market for transactions for the purchase and sale of currency, securities and labor, where prices are set publicly (quoted). This definition does not apply to the labor exchange.

In the practice of commodity exchanges there are several types of transactions: forwards, futures, options. Exchange practice is associated with the concept of “hedging” (fencing, insurance). This is a process that aims to provide insurance against possible losses due to sharp price fluctuations.

The main players on the exchange are: broker, broker, dealer, “bull”, “bear”.

Market failures.

Failures are cases when market self-regulation does not solve the economic and social problems of the market and government intervention is required to solve them. There are many forms of manifestation of market failures:

The emergence of external effects.
The market does not produce public goods.
Asymmetry of information.
The market is associated with risk and uncertainty.

What's happened externalities? These are the costs or benefits from the side effects of externalities in the process of market transactions, but are not reflected in the market prices of goods and services. External effects affect primarily third parties (people who are not directly involved in the material and monetary costs of producing these services and goods. External effects can be negative and positive.

The consequences of externalities are that resources are allocated inefficiently and social utility is lost. An example of negative externalities can be such phenomena as environmental pollution by firms (harmful emissions) or the effect of “passive smoking”.

Today, the consequences of environmental pollution have become international in nature (the global “greenhouse effect”).

The issue of regulating external effects in the 20th-21st centuries is very acute. Negative externalities are regulated through standards and regulations, taxes, “emissions fees,” etc.

Positive external effects - for example, facilitating the opportunity to receive additional education - scientists, for example, A. Pigou, propose to regulate through subsidies and grants.

Public good are goods and services that everyone needs, regardless of the price for them. A pure public good is a good that cannot be provided to one person without providing it to everyone else. Usually these goods are consumed together. Public goods have features of non-excludability and shared consumption; the emergence of new consumers usually does not reduce the benefits of consumption for others, etc.

These goods are usually associated with the free-rider effect, which is the temptation for people not to pay for their production. The difficulty of obtaining payment for them makes their production unprofitable, so the state is forced to take it upon itself. An example of purely public goods: national defense, road networks, fire services, etc. In fact, these goods are paid for by all taxpayers. There are other types of public goods that people can receive either free or for a fee.

Another type of market failure is information asymmetry. This is a situation when some market participants in the process of a transaction possess important information that other participants in the transaction do not possess. This phenomenon is relevant to many markets: the labor market, the market of complex goods and services, securities, etc.

Test questions for self-test.

Name the functions of the market. Which of these functions, in your opinion, do not work in the economy of modern Russia?
What functions does the market infrastructure perform? What elements of financial market infrastructure do you know?
Name the forms of manifestation of market failures.
Name the main market agents.

Issues for discussion.

Explain how the market serves as a means of exchanging information about the decisions of households and firms.
Are market failures related to ethical issues? Or is it just economics?

Main literature.

1. Pyastolov S.M. Economics.ch.6

2. Economic theory (political economy). /Ed. Vidyapina V.I. And Zhuravleva G.P. - Ch.10,11.

Questions to think about.

Give an economic explanation for the graphical representation of fixed, variable, total, average and marginal costs.
In the long term, as opposed to the short term, firms can make all the desired changes in the structure of the resources used. How, in this case, will determine the minimum efficient size of firms?

Main literature.

1. Pyastolov.S.M.Economics., Ch.3

2. Economic theory (political economy). /Ed. Vidyapina V.I. And Zhuravleva G.P. - Chapter 3-7,11.

Additional literature.

Economic theory. Microeconomics - 1,2./Ed. Zhuravleva G.P. - Chapters 5,6.
Economy. /Ed. Bulatova A.S. - Chapter 5.
Microeconomics. Theory and Russian practice. /Under. Ed. Gryaznova A.G., Yudanova V.P. T.2
Nureyev R.M. Microeconomics course. Chapter 3-13.
McConnell K., Brew S. Economics. Chapter 4.30.

Questions to think about.

How do you understand F. Hayek’s expression: “Competition is a discovery procedure...”?
What determines whether an industry will be competitive, that is, consisting of a large number of small firms, or will it be dominated by a few large firms?
What are the similarities and differences between monopolistic competition and perfect competition?
What are the strengths and weaknesses of antimonopoly regulation in Russia?
The small number of oligopolistic competitors means universal interconnectedness. Other things being equal, will this interdependence change directly or inversely with product differentiation by number of firms?

Lecture 5.

Plan

The essence of inflation as a socio-economic process.
Conditions and causes of inflation, inflation factors.
Basic principles of inflation classification.
Measuring inflation: indicators and main problems.
Socio-economic consequences of inflation.
Anti-inflationary policy.

Lecture abstract

The essence of inflation as a socio-economic process.

The term “inflation” (from the Latin Inflatio – “bloating”) was first introduced during the American Civil War in 1861-1865. XIX century to denote the situation of money losing its purchasing power. This concept appeared in scientific literature in the twentieth century.

However, this phenomenon itself has been known to mankind since the advent of money circulation. And in the twentieth century, inflation became chronic, almost inevitable, since there were significantly more factors provoking it than restraining factors.

In economic theory, approaches to understanding the role and consequences of inflation have been different. Representatives of classical bourgeois political economy studied inflation as part of the theory of money. Even J.M. Keynes was the first to analyze inflation as an element of macroeconomic theory, and later monetary theory already included the problems of inflation in macroeconomic theory as its important component. All this suggests that inflation is a controversial phenomenon.

In Russian economic literature, inflation has been interpreted in different ways. In the 1930s - as excessive issuance of banknotes; in the 1960-1970s – as a multifactorial phenomenon that does not have an unambiguous interpretation.

Thus, inflation is a multifaceted phenomenon that incorporates production, monetary and reproduction aspects. Inflation can be defined as follows: inflation is a decrease in the purchasing power of a nominal monetary unit under the influence of a number of factors, which is expressed, first of all, in the emergence of a steady trend towards an increase in the general level of prices in the markets for goods and paid services.

The important points in this definition are:

"a number of factors"
"sustainable trend"
"general price level"
"in commodity markets"

Conditions and causes of inflation, inflation factors.

The condition for the occurrence of inflation is the discrepancy between the nominal money supply, on the one hand, and the commodity supply, on the other. The situation is derived from the equation of monetary exchange (I. Fisher model) of the quantitative theory of money: M × V = P × Y,

where M is the amount of money in circulation;

V – velocity of money circulation;

Y – real income;

P – price index.

But this condition alone does not explain the causes of inflation. Inflation can be accompanied by both growth and decline in production.

The most important reasons can be grouped in different ways, for example, divided into internal and external.

Lecture 6.

Plan:

Labor market (labor force). Employment indicators and unemployment.
Historical approach to the analysis of the causes of unemployment and classification of its types.
Monetarist approach to the analysis of unemployment. Modern classification of unemployment.
Consequences of unemployment: non-economic and economic. Okun's Law.
State policy to combat unemployment.
The relationship between inflation and unemployment.

Lecture abstract.

Labor market (labor force). Employment indicators and unemployment.

Labor market– the sphere of sustainable exchange between sellers of labor services and buyers of these services.

This market, unlike others, is subject not only to the laws of economics, but also to socio-psychological laws. The economic function of the labor market is to ensure optimal reproduction of the labor force, and the social function is to ensure the quality of life of the worker and his family.

The labor market mechanism at the macro level is a combination of the aggregate market demand (AD) for labor services and the market supply (AS) of labor services.

The object and subject of the labor market is the population, and the initial indicator of the labor market is employment of the population.

The population (POP) from a macroeconomic point of view is divided into two groups:

Included in the labor force (according to the MOT classification - “economically active population” (L).
Not included in the labor force (NL).

POP = L + NL

People not included in the NL workforce are sometimes called the institutional population. This group includes two large subgroups:

Children under 16 years old.
People serving time in prisons.
People in psychiatric hospitals.
Disabled people.

Full-time students.
Retired.
Housewives.
Tramps (homeless people).
People who were looking for work, but stopped looking for it.

Thus, the labor force includes two groups of the population: employed and unemployed.

Busy (E)– people who have a job, it does not matter whether the person is employed full-time or part-time

Unemployed (U)– people who do not have a job, but are actively looking for it, or waiting to start working. Finding a job is the main criterion for an unemployed person.

Unemployment figures:

The main indicator is the unemployment rate. The unemployment rate is the ratio of the number of unemployed people to the total labor force.

U = U x 100%

The average duration of unemployment per unemployed person.
Share of working time lost due to unemployment.

Market: essence, functions. Market failures.

Plan.

Market: essence, functions, structure.
Approaches to classifying market types. Market infrastructure.
Market failures.

Lecture abstract.

Market: essence, functions, structure.

In the history of the development of a market economy, a number of stages can be distinguished: exchange, commodity circulation, market.

The main condition for the emergence of exchange, and then the market, is the social division of labor. Exchange exists in all historical eras (there may also be an exchange of labor products - barter), but commodity circulation appeared later. It represents a commodity exchange mediated by money (C – D – C), therefore it is associated with money circulation. Approximately 6-7 thousand years ago, commodity circulation began to be universal and established itself as a market system.

Thus , The market is the result of the natural historical process of development of the commodity economy, conditioned by the division of labor and the isolation of economic entities. Moreover, the market is not only a historical phenomenon, but also a cultural, philosophical and, of course, economic one.

Market failures include externalities. At the same time, the market is not able to adequately transmit information about price. Pricing policy must reflect the objective cost of production of goods and services. The buying and selling process involves the manufacturer and the client. If their actions begin to influence third parties not involved in the trading process, then we are talking about such types of market failure as externalities. For example, environmental pollution.

4. Public goods as a manifestation of market failures. Properties of a pure public good. "Quasi-public" benefits and their types.

1. Public goods are goods that have the following characteristics:

A sign of non-exclusion - it is almost impossible to exclude a person from the circle of consumers of a given good

A sign of non-competitiveness in consumption - the consumption of a good by one person does not reduce the possibilities of consumption by another

Sign of indivisibility - a good cannot be decomposed into separate units

This definition is well illustrated by the following examples:

The lighthouse that guides sailors at night shines on everyone its light reaches.

Ensured internal and external security of the state is available to everyone who is on its territory.

Public goods are not at all similar to private goods; it is almost impossible to organize their sale: individuals enjoy the effects of public goods, but avoid paying for them (free rider effect).

There are not many pure public goods; mixed goods are more common, including properties from both private and public goods. These are club goods, transferable goods and shared resources, such as clean water and fish in the sea.

Market failure is the inability of the market to allocate scarce resources efficiently.

Of the many possible causes of market failure, three deserve special attention: externalities, public goods, and insufficient competition.

Why is the state engaged in the production of such a large number of goods, the supply of which would be more efficiently organized by private firms? Some answers, mainly related to political imperialism and the dysfunctional nature of politics, were offered in Chapter 9. But there are less fundamental reasons, such as the belief that the state should provide public goods. Economists have recently come under scathing criticism of this argument. However, entrepreneurs don't wait for scientists to show them the way; While scientists debated whether markets could work, markets produced what consumers needed, from lighthouses and schools to postal services and flood insurance. The "market failure" claim is perhaps the most important intellectual argument for government intervention in the market system. Some economists argue that, in certain circumstances, markets fail to provide what we want and would be willing to pay for. However, if a person declares a market failure outside of the pages of an academic economics journal, he usually means that the market failed to provide something that he himself needed. Economists argue that people will “freeload” on the provision of non-exclusive goods; that is, some shipowners will not make contributions to the maintenance of the lighthouse, since they can use its services while others make contributions. Of course, if many people are trying to “travel without a ticket,” perhaps this service will not be provided at all. Therefore, some economists believe that the state, in order to correct market failures, should collect taxes and provide such services itself.

Quasi-public goods are useful goods, the consumption of which creates a healthy lifestyle and socially favorable habits. Their consumption is considered desirable. Such benefits can be considered healthcare, free secondary education, free vaccinations for animals, national defense, etc.

Quasi-public goods are easily amenable to market pricing (costs + profit = PRICE), but because of their positive effect on the population, the state consciously bears the costs of their production. In essence, the state endows private goods with the properties of public goods.

5. Demand for pure public goods and its features. The free rider problem

A pure public good is a good that is consumed collectively by all people, whether they pay for it or not. It is impossible to obtain utility from the provision of a pure public good by a single consumer.

The demand curve for a pure public good is obtained by adding up its individual marginal utilities for all consumers at each possible price, which involves vertically summing the individual demand curves.

The free-rider effect is an economic phenomenon that manifests itself in the fact that the consumer of a public good tries to avoid paying for it.

The free-rider problem occurs when an individual is deliberately unwilling to pay for a public good, expecting to receive the benefit without any payment. One of the most striking examples of the free-rider problem is the phenomenon of citizens evading taxes that are used (among other things) to provide public goods.

The free rider problem is that free riders underestimate the value of a pure public good, which results in its production being lower than its efficient quantity. Thus, the possibility of free consumption of purely public goods causes inefficiency in their production.

Ultimately, a situation may arise where no one will pay and the provision of a purely public good will be impossible. In other words, everyone is interested in consuming a purely public good, but no one wants to pay. In this regard, the task of producing purely public goods comes down to solving the question of how to ensure their production in the presence of free riders.

Solving the free-rider problem by elimination either involves significant costs or leads to underproduction of a purely public good and, consequently, to a decrease in total utility. In this case, the provision of purely public goods becomes possible only with the participation of the state.

The forms of state participation in the provision of purely public goods are different: from the direct production of the good (national defense, fire protection) to the financing of public goods produced by the private sector (cleaning and garbage removal, some types of medical care). However, their essence is the same: the production of public goods provided through the state is financed by taxes levied on all citizens as a method of solving the free-rider problem.

Providing public goods with the participation of the state does not mean automatically achieving an effective volume of their production. Because of the tendency of low-income individuals to limit funding for the production of public goods by reducing taxes, the supply of public goods is reduced to below efficient levels. The use of a differentiated tax rate helps to reduce losses in the efficiency of production of public goods, but encounters the problem of determining consumer preferences, without which it is impossible to reasonably differentiate the tax.

The sources of market failure are. Market Failures, Market Fiasco

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