Markets fail. We live in a dynamic world and as a result we are constantly experiencing change, both good and bad. It can come in the form of surpluses or shortages, high prices, apparent favoritism, etc.
Public goods and negative externalities indicate the most common consequential situations indicative of a market failure. A public good is a good or service that appears to be non-rival and non-excludable. (One’s consumption of the good does not reduce the availability of the good to others and no one can be excluded from that goods’ consumption.) An example of a public good is broadcasting. Anyone can tune in to a radio program and their consumption does not take away from the consumption of another. Negative externalities occur when a producer fails to account for all of the costs of a process and passes those negative costs onto others without their consent. A good example of a negative externality is pollution. It is a cost that producers often do not have to pay for but by which others are negatively affected.
The neo-conservative response comes mainly in the form public choice theory. They hold that a market failure necessitates a government intervention. Hence, public choice theorists study politics as economics. This study empowers individuals and groups to effectively influence the political process for the efficient provision of public goods. And public choice theorists can be found on both sides of the aisle. Both Republicans and Democrats seek to use government as a means to provide what each deems public goods.
But, government intervention results in government failure. While neo-conservative public choice theory correctly identifies market failures and government failures, it then wrongly assumes that a continuing political process will eventually provide public goods (chief among them being good public policies) efficiently. They assume a central authority possess all of the information necessary to bring about the same innovations as markets. But knowledge is dispersed and no amount of centralization will ever change that. They fall into the nirvana fallacy, assuming that since markets fail, their governmental solutions are the only solutions.
Market failures are actually constructive because they provide information to entrepreneurs. Prices promote competition, reveal inefficiencies, and incentivize others to discover alternatives. As a result, there are no such things as permanent public goods. They are merely exciting and motivating opportunities for innovation. The solutions to market failures lie within the problem itself: Markets fix market failure.