For many people in the northeastern United States, there is
no better way to relax than to fish in one of the region’s
thousands of lakes. But in the 1960s, avid fishermen no-
ticed something alarming: lakes that had formerly teemed
with fish were now almost empty. What had happened?
The answer was acid rain, caused mainly by coal-burning
power plants. When coal is burned, it releases sulfur dioxide
and nitric oxide into the at-
mosphere; these gases react
with water, producing sulfuric
acid and nitric acid. The result
in the Northeast, downwind
from the nation’s industrial
heartland, was rain sometimes
as acidic as lemon juice. Acid
rain didn’t just kill fish; it also
damaged trees and crops, and
in time even began to dissolve
limestone buildings.
You’ll be glad to hear that
the acid rain problem today
is much less serious than it
was in the 1960s. Power plants
have reduced their emissions
by switching to low-sulfur coal
and installing scrubbers in
their smokestacks. But they
didn’t do this out of the
goodness of their hearts; they
did it in response to govern-
ment policy. Without such
government intervention, power
companies would have had no
incentive to take the environmental effects of their actions
into account.
The Gulf of Mexico oil spill of 2010 is among the re-
minders that environmental problems persist. Neglected pol-
lution is one of several reasons why markets sometimes fail
to deliver efficient quantities of goods and services. We’ve al-
ready seen that inefficiency can arise from market power,
which allows monopolists
and colluding oligopolists to
charge prices above marginal
cost, thereby preventing mu-
tually beneficial transactions
from occurring. In this section
we will consider other reasons
for market failure. In Modules
74 and 75, we will see that in-
efficiency can arise from exter-
nalities,which create a conflict
between the best interests of
an individual or a firm and the
best interests of society as a
whole. In Module 76, we will
focus on how the characteris-
tics of goods often determine
whether markets can deliver
them efficiently. In Modules
77 and 78, we look at the role
of government in addressing
market failures. The investiga-
tion of sources of inefficiency
will deepen our understand-
ing of the types of policy that
can make society better off.Module 74:Introduction to Externalities
Module 75:Externalities and Public Policy
Module 76:Public Goods
Module 77:Public Policy to Promote
Competition
Module 78:Income Inequality and Income
Distribution
Economics by Example:
“Why Not Split the Check?”
section
Market
Failure and
the Role of
Government
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AP/Wide World Photos
For many polluters, acid rain is someone else’s problem.