These spillover effects can be positive or negative. In the event of a positive externality, the private market produces too little of the good, and a subsidy may be required to generate the socially optimal level of output. A common example of positive externalities, on the consumption side, is education. Negative externalities are detrimental third party effects, with pollution being the classic example on the production side. Negative externalities result in the market producing too much and selling the good for too little when the market is left unregulated.
Solutions range from direct regulation to taxation, and even more creative mechanisms.
For example, the pollution externality is in part corrected by the creation of a market for pollution permits. 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.