Market Failures And Its Effects On The Environment Essay

Market Failures And Its Effects On The Environment Essay

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Market failures can stem from externalities that cause the market to not be at equilibrium, thus causing harm or less benefit to society and the environment as a whole, however, this can be corrected by government involvement. There are negative and positive externalities that exist outside of market transactions that can have effects on third parties not directly involved in the consumption or production of the good (Market failures and externalities. (n.d.)). These externalities affect the optimum level of equilibrium, consequently causing market failures. With the help of government policies, these externalities can be offset. Government policies can reallocate resources in order to maintain the socially efficient level to maintain the environment and decrease the welfare lost.

The main goal of a market is to confront the issue of scarcity by achieving a socially efficient allocation of resources. When resources are not allocated properly and there exists surpluses or shortages that cause disequilibrium, markets are considered failed. One major way in which market failures can occur is when there exists an externality. The consumption or production of a certain good may have external effects on society by having “spill-over effects” that aren’t properly balanced out. This is because the “price-mechanism” does not take into account the social cost or social benefits associated with the production or consumption of a good.

Positive externalities result in social benefits and are when the marginal social benefit is greater than the marginal private benefit, as seen in Figure 1 (ukeconomics onlin). A simple example of a positive production externality is say a person grows a beautiful garden that is quite pleasing to the eye and...


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...nt involvement that aims at correcting market failures brought about by positive externalities are subsidies or grants. To correct for market failures brought about by psitive externalities, the quantity supplied or the quantity demanded must be increased because both create an increase in external benefits.To increase quantity supplied of goods that generate external benefits, would be to decrease price costs associated with production. To increase the demand for goods that generate external benefits, would be to decrease the price paid by consumers. For an example, there is a positive externality associated with a person getting a higher education. By getting a higher education, society benefits. In order to reach maximum benefit, the government would want to encourage people getting a higher education by making going to college more affordable, to do this, they wou

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