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CHAPTER10Market FailuresIn the previous chapters, we saw how markets utilize individual selfinterestto efficiently allocate resources (means) among alternative endsvia the pricing mechanism. However, markets function efficiently onlywith a narrow class of goods. We have already shown how monopolies underminethe ability of the market to efficiently allocate, but monopoliesare a type of market failure generated by a structural problem: the absenceof competition. Markets also fail because of inherent characteristics of certaintypes of resources or because there are no institutions clearly definingproperty rights. The purpose of this chapter is to describe the characteristicsthat make a particular resource a market good and to examine whathappens when resources do not have these characteristics. As we will show,none of the goods and services provided by natural capital has all of thecharacteristics required for efficient allocation by the market.For simplicity, in this chapter we will boil down the various conditionsfor arriving at Pareto optimal allocations, described in Chapter 8, to thegeneric equation “marginal cost equals marginal benefit,” or MC = MB. Inaddition, we will often use the term Pareto efficient or just efficient as theequivalent of Pareto optimal.■ Characteristics of Market GoodsExcludabilityWe first defined and discussed excludability in Chapter 4 and briefly reviewthe concept here in recognition of its importance. An excludable goodis one for which exclusive ownership is possible; that is, a person or communitymust be able to use the good or service in question and preventothers from using it, if so desired. Excludability is virtually synonymouswith property rights. If a good or service is not owned exclusively by165