Causes Of Market Failure Essay

POLLUTION AS AN EXTERNALITY

PP5403 – ECONOMIC FOUNDATIONS – MICROECONOMIC ASSIGNMENT

MARKET FAILURE

Market failure is the economic condition where markets fail due to inability to provide goods and services in the market efficiently. This creates negative effects on an economy as the optimal distribution of scarce resources are not conquered, which results in outcomes where one group of people are better off while others are not.

Some of the causes for market failures are: monopoly power, missing markets, incomplete markets, externalities, property rights, information asymmetry, and inequality of how scarce resources, goods and services are allocated and distributed within society.

This assignment focuses broadly on pollution which is an example of a negative externality.

NEGATIVE EXTERNALITIES

Negative externalities are costs that arises when market activities have adverse effect on third parties and no one pays or receives compensation for it. It is an additional marginal social cost to the government, producers or consumers who have to bear it in the market to internalize its effects indirectly on the society. As explained by

Tradable permits: Tradable permits are selling permits for the pollutants to pollute by taking the market forces of external costs into account when planning their consumption and production. It is a simple way to achieve a pollution cost that is optimal to the society. Tradable permits affects producers more than it does to consumers. Consumers are more inelastic to price changes by these permits while these permits allow pollutants to reduce their own emissions for lower cost of production or reduce their emission to below the targeted level required by the government. It also allows the pollutants to sell, buy and store the excess permits from and other participants polluting the environment, so that government intervention is