A tax that is used to correct for externalities is called a Pigouvian tax . A separate area of market failure involves public goods, common resources, and natural monopolies . These types of goods are characterized by whether they are rival and excludable in consumption. Goods that are both rival and excludable in consumption are private goods, and there is typically no market failure associated with them. For these goods, government provision is usually necessary and desirable, because the free-rider problem keeps individual from making the appropriate expenditures in the unregulated market.
National defense is the classic example.
Common resources are rival in consumption, but not excludable. Goods that are non-rival in consumption but that are excludable are typically natural monopolies. Most of the cost of fire protection is expended before any fires are ever fought, making the start up cost high, but the marginal cost of putting out an additional fire low. Natural monopolies are usually either run by the government, or privately operated but government regulated. Yet another source of market failure involves incomplete information .