There are two main types of market failure that provide rationales for why the government provides a wide range of goods and services that economists call externalities.

Positive externalities are a market failure where the benefits of a good cannot be constrained to those who choose to pay for it and this type of market failure is called the free rider problem. An example of free riders is fire protection for a community, it is to everyone's benefit that the fire department exists and any person who does not pay still receives rewards for the system. Market failures are also caused by negative externalities, where a transaction between two other parties imposes a cost on third parties. Pollution is a negative externality where the transaction between customers and businesses do not reflect the cost on the environment justifying government regulation. Another form of negative externalities is the market failure of the tragedy of the commons where a public resource is depleted below sustainable levels.