According to the public interest theory, government regulation is undertaken to overcome market failures, so that the economic system can operate in a manner consistent with the public interest. One type of market failure is due to externalities. These refer to beneficial or harmful effects received or borne by firms or individuals other than those producing or consuming the product or service. We have external economies and diseconomies of production and consumption. External economies of production are uncompensated benefits received by firms other than those involved in the production of the good or service. External diseconomies of production are uncompensated costs imposed on firms other than those involved in produc¬tion of the good or service. External economies of consumption are uncompensated benefits received by individuals other than those consuming the good or service. External diseconomies of consumption are uncompensated costs imposed on individual other than those consuming the good or service. Market failures due to externalities can be overcome by prohibitions or regulations, taxes or subsidies, voluntary payments, mergers, or the sale of pollution rights.