important lesson of Adam Smith’s idea of the market as an invisible hand, guiding the economy’s scarce factors of production to their best uses That is not always the case, however We have studied several situations in which markets are unlikely to achieve efficient solutions In an earlier chapter, we saw that private markets are likely to produce less than the efficient quantities of public goods such as national defense They may produce too much of goods that generate external costs and too little of goods that generate external benefits In cases of imperfect competition, we have seen that the market’s output of goods and services is likely to fall short of the efficient level In all these cases, it is possible that government intervention will move production levels closer to their efficient quantities In the next three sections, we shall review how a government could improve efficiency in the cases of public goods, external costs and benefits, and imperfect competition Public Goods A public good is a good or service for which exclusion is prohibitively costly and for which the marginal cost of adding another consumer is zero National defense, law enforcement, and generally available knowledge are examples of public goods The difficulty posed by a public good is that, once it is produced, it is freely available to everyone No consumer can be excluded from consumption of the good on grounds that he or she has not paid for it Consequently, each consumer has an incentive to be a free rider in Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 789