The major source of externalities is the production process. Basically, negative externalities result from the various forms of pollutions such as air and noise pollution from industries. Additionally, the prime source of positive externality is production activities that benefit third parties. For instance, production leading to infrastructural development which benefits the society at large.

The common sources of market failures include

• Asymmetric information. The dissimilarity in information concerning the markets whereby one player has more information than the other a major source of market failure. Ideally, the party in possession of the information exploits the disadvantaged one. Unfortunately, the situation might lead to the withdrawal of the inferior party from the market leading to market failure.
• Incomplete markets. The absence of various necessary market conditions leading to inequality between costs and social and private benefits in different markets render them incomplete.
• Imperfect markets. Lack of Pareto efficiency leads to market imperfection. A perfect example is the existence of monopolies which contribute towards market failure.