ABSTRACT
The relative absence of coercion, the ability to make free and independent decisions, is central to any distinction between markets and government. The nature of the public good/private good dichotomy is not that it neatly defines which goods the government should produce and which goods the market should produce, but that it recognizes a continuum between two fictitious extremes. One extreme is the perfectly rival, excludable private good that markets do a good job of providing; the other is the perfectly nonrival, nonexcludable public good that markets will not provide at all. An externality exists because the production of the commodity has a public good aspect. The essence of externalities as a source of market failure is that a public good characteristic is produced as a by-product of another decision. Chemical plants may produce toxic wastes as well as valuable chemicals; inoculated people may slow the spread of infectious diseases.
