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arket will no longer to be Pareto optimal. Second reason is the actions of an agent can be externalities. For an example, when a firm producing the tires, it will use the capital, labour and other inputs, and this will cause the reflected of the price of the tires in the market. The firm maybe will make air pollution when they produce the tires. That is not force the firm to pay for use of this resource, all of the cost will be borne by the society. So, the market price of the tires will decrease and they cannot get the full opportunity cost when sell to society. This will also cause the market equilibrium in the tires will not be optimal. The third reason is some of the markets will fail because of the nature of their exchange or the nature of certain goods. While the markets have the important transaction costs, information asymmetry or agency problem, they can cause inefficiency, and market failure.

Next, the government can overcome the market failures by using the three popular ways. The three tools that the government uses are internalization or merger, tax and subsidy plans and legal restrictions. The internalization or merger is means that the government merges two firms together to save their ailing or the management problems. It also can help the firm to increase their working rate, reduce the cost of product and develop a more efficient plant structure. For an example, there is a firm that produces lettuce picking machines, the machines cause the water pollution because the firm don want to purchase the waste treatment facilities because it is expensive and they dumps the wastes into the river. They think that is only a low cost and the machines can offered for sale at low price. The more lettuce picking machines are built, will cause more water pollution. The ways that can overcome this problem is merge the lettuce producing firm to the firm that manufactures picking machines. The diagram below is show that the two firm before merge, there are a few disadvantage that cause by each other. After merge, the produce rates of each other are increase so they can earn more profit.

The next ways that government use to overcome the market failure is tax and subsidy plan. Tax can increase the private cost of production or consumption and it also can reduce the demand or the output of the goods which are already shortage. The sources of earning that are need to pay the tax are pensions, annuities or other periodic payments, royalties, rents or premiums, dividends, interest or discounts, remuneration and profits from an employment, profits from the trade, the business and profession. There are five type of the tax that use in Malaysia, they are company tax, personal income tax, sales tax and service tax. The company tax refers to tax that the company need to pay, but some of the company no need to pay the tax because there are resident company or the sources outside our country, such as insurance business, air or sea transport enterprises. About the personal income tax, the people in Malaysia are liable to pay this tax and the tax rate will depends on individual determine by the duration of stay in Malaysia. The next is sales tax, this tax is add on the import and manufacturing levels. The manufactures need to be licensed under Sales Tax Act 1972. But the license will be exempt if the annual sales of the firm cannot more than RM 100000. Last is the service tax, this tax we always can see at the restaurant or