There is a vast literature on market failure (see, for example, Cullis and Jones, 1998) and here only some of the essentials are set out in order to emphasize that individual decision-making and competitive markets cannot be relied on to promote an efficient allocation of resources. In general terms the concept of market failure challenges the concept of market success that suggests that competitive markets result in welfare optimization. It does this by emphasizing issues that freely competitive markets fail to address; these are the circumstances in which markets may fail to provide efficient solutions to problems of resource allocation. Some aspects of market failure apply more strongly than others to housing development and planning, and it is these aspects which will receive the most attention (for further discussions of market failure and planning, including the planning of housing, see Oxley, 1975; Walker, 1980; Bramley et al., 1995). Thus, the emphasis below is placed on externalities, public goods, merit goods and the concept of equilibrium. Most weight is given to externalities, and the application of externalities to housing is illustrated by reference to the impact of living conditions on health, education and crime. The ability of planning systems in principle to promote positive externalities and minimize negative externalities is discussed. Planning policy instruments are seen as one set of public-policy reactions to externalities alongside taxes.
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