In a pure market system, consumers are said to be sovereign – the combination of their choices, freely made, determines the allocation of resources, and consumer benefit (measured as consumer surplus) is maximised.

But there are times when markets fail to produce an optimal allocation of resources – the value an individual places on education or health may not equal the social benefit derived from a skilled and healthy workforce – or the individual may not be able to afford these expensive so-called merit goods (or services). In this case consumer sovereignty fails to deliver what is best for society.

Other public goods exist which cannot be priced properly (handout) because it is not possible, with street lighting or defence, for example, to exclude you from the lit street or the safe country if you refuse to pay.

And finally, there are externalities, defined as costs (negative externalities) or benefits (positive externalities) which are either paid for by someone else or enjoyed by someone else. Pollution, congestion (see extract) and climate change are three pressing issues to do with the market failure of  externalities. We are still evaluating the effect of diesel fumes in London on public health – someone pays, but not the bus passenger or the car owner. The scandal in 2015 of VW fixing emissions tests to under-record emissions of dangerous nitrous dioxide is a case in point.

An optimal allocation of resources requires that we add up the true cost – the marginal private cost and the marginal social cost. If we’re not willing to pay the cost as consumers, the Government should increase taxes on such externalities.

It is one of our eternal economic truths that you cannot beat the market – and governments should try and work with market forces. But are we really doing this in our attempts to save the planet from the effects of global warming (see the Stern Review on Climate Change, a Government report of 2006)? What economic policies would you recommend? Are we doing enough to change relative prices (of fossil fuels for instance) in order to redirect how we spend our money and how society uses its scarce resources?