Explain why the use of petrol and diesel cars may be a source of market failure.

Pollution from petrol cars is an example of a negative externality (where the actions of one person impact another without the affected person being compensated). In a competitive economy people pay the "market price" for a good (where supply equals demand). However this does not take into the account the costs to others of that good being produced or consumed. When one person drives a car it makes the road more congested and petrol cars cause pollution and contribute to rising CO2 levels (again affecting others). Because the private benefit is greater than the social benefit, the good is over-consumed with the negative effects on others (called externalities) not taken into account.Therefore we can say that the market has failed to allocate resources well. Governments can try to solve such market failures for example through taxes (increasing the price of petrol) or controls (limiting the quantity of petrol produced).