Gig Giacona wrote:

How about an example..

That's easy; straight out of any intro economics class.

For example, consider a factory. It has a choice of producing in an
environmentally friendly way at price X, or in an environmentally
unfriendly way at some fraction of X.

Even if we assume everyone operating with complete knowledge and
"enlightened self interest", if the market for the factory is sufficiently
larger than the population impacted by the pollution generated by the
factory, it is more "market friendly" (ie. more profitable) to operate in
an environmentally unfriendly way.

These are called "market failures". The term "failure" is based upon a
judgement against some ideal, which tells you that even economists have
aspirations that aren't market-driven grin.

It's been a while, but I think the definition of "market failure" is where
the market doesn't allocate resources to maximize consumer satisfaction.
In the above example, even if we assume people would be willing to pay a
higher cost for their products to maintain a clean environment for
themselves, this doesn't happen because most dollars spent would provide a
clean environment for someone other than the buyer.

That is, the consumers of a given factory's output aren't those that suffer
from the pollution from that factory.

It seems to me that whenever there is a cost paid by someone other than the
consumer, this type of situation can arise. I *think* this is what is
meant by an "externality", but I'm not sure (like I said: it's been a
while).

- Andrew