What´s Market Failure?

Market failure, a term used frequently by micro economists is utilized when a market is not spending its resources efficiently in a free market. In the article being referred to, market failure is achieved but in this case it is working inefficiently by creating negative externalities. Negative externalities are defined as the situation where a product costs more to society than its private costs. Throughout the article it appears clear that a significant production externality is taking place. This becomes apparent because the production of clothes in Bangladesh has created more than 1000 proven deaths and no private payment can ever pay for that society cost making this a clear case of a market failure, more specifically a negative production externality. It is to be taken into account that not only has the social price already been unfixably surpassed but also it is progressively worsening slowly

In the diagram to the right, a negative production externality is shown according to the microeconomics situation found in the article. It is to be taken into consideration that MPB (marginal private benefit) and MSB (marginal social benefit) are seen as demand. As shown, MPC (marginal private cost) exceeds MSC (marginal social cost). This creates a surplus of supply and thereby moves Qopt to Qm taking the quantity out of what is optimally required by society and creating market failure. On the other hand, price has moved from Popt to Pm thereby creating the external cost that is shown between MPC and MSC. It is through the diagram that it appears clear that producers are in fact overproducing due to the external costs that society has to pay. In this case however, the cost paid by society is manifested by the worsening of health (and death) of the people in Bangladesh.

Regardless off what economic theory might say, the effects given off by the factories in Bangladesh are too negative for an optimal level of production to exist. This means that there is no amount of supply that should ever exist taking the repercussions into consideration. “In Savar, we have lots of coconut trees, but they don’t produce coconuts anymore. Industrial pollution is damaging our fish stocks, our fruit produce, our vegetables.” In this case the externalities cannot be measured accurately because health is only one negative aspect of the problem.

In response to the negative externality given off, a few solutions might be helpful to deal with the excess of marginal social cost.