626 PART • Information, Market Failure, and the Role of Government may prevent some markets from ever developing It may, for example, be impossible to purchase certain kinds of insurance because suppliers of insurance lack adequate information about consumers likely to be at risk Each of these informational problems can lead to competitive market inefficiency We will describe informational inefficiencies in detail in Chapter 17 and see whether government intervention might help to reduce them Externalities The price system works efficiently because market prices convey information to both producers and consumers Sometimes, however, market prices not reflect the activities of either producers or consumers There is an externality when a consumption or production activity has an indirect effect on other consumption or production activities that is not reflected directly in market prices As we explained in Section 9.2 (page 323), the word externality is used because the effects on others (whether benefits or costs) are external to the market Suppose, for example, that a steel plant dumps effluent in a river, thus making a recreation site downstream unsuitable for swimming or fishing There is an externality because the steel producer does not bear the true cost of wastewater and so uses too much wastewater to produce its steel This externality causes an input inefficiency If this externality prevails throughout the industry, the price of steel (which is equal to the marginal cost of production) will be lower than if the cost of production reflected the effluent cost As a result, too much steel will be produced, and there will be an output inefficiency We will discuss externalities and ways to deal with them in Chapter 18 Public Goods • public good Nonexclusive, nonrival good that can be made available cheaply but which, once available, is difficult to prevent others from consuming The last source of market failure arises when the market fails to supply goods that many consumers value A public good can be made available cheaply to many consumers, but once it is provided to some consumers, it is very difficult to prevent others from consuming it For example, suppose a firm is considering whether to undertake research on a new technology for which it cannot obtain a patent Once the invention is made public, others can duplicate it As long as it is difficult to exclude other firms from selling the product, the research will be unprofitable Markets therefore undersupply public goods We will see in Chapter 18 that government can sometimes resolve this problem either by supplying a good itself or by altering the incentives for private firms to produce it E XA MPLE 16.5 INEFFICIENCY IN THE HEALTH CARE SYSTEM The United States spends a larger fraction of its GDP on health care than most other countries Does this mean that the U.S health care system is less “efficient” than other health care systems? This is an important public policy question that we can clarify by taking advantage of the analysis presented in this chapter There are two distinct efficiency issues here First, is the U.S health care system technically efficient in production, in the sense of utilizing the best combination of such inputs as hospital beds, physicians, nurses, and drugs to obtain better health outcomes? Second, is the United States output efficient in the provision of health care; that is, are the health benefits from the marginal dollar spent on health care greater than the opportunity cost of other goods and services that might be provided instead?