1. Market Failure of air pollution
By Young – Joo Kim

2. -Link-

3. Identify the spillover
SMC1
PMC=SMC
Costs
Deadweight loss PS
PFM
PMB QS
QFM
Output

4. Why its market failure
If we assume that the factory (such as chemical, iron…) trying to maximise the profits, then producer only consider their own private costs and private benefits from their supply of production so they will produce at the output level QFM.
However the socially efficient level of production after considering the spillover costs on third parties is Qs.
I.e. In this example a free market would over produce because the film won’t take account of the negative spillover.