The Externalities ASSOCIATED WITH Market Failure Economics Essay

Market failing occurs when the allocation of resources in a free market is inefficient. Market inability occurs when the marketplace is not in perfectly competitive. There are multiple reasons to cause market failure. The main causes of market failure are

a) Negative Externalities

Externalities are defined as the uncompensated impact of 1 person's activities on the well-being of the bystander. Negative externality such as the effect of environmental air pollution can cause the marginal sociable cost(MSC) of development to surpass the marginal private cost(MPC) according to the diagram below

In the process of development, the firms may cause the pollution of the environment. The air pollution is harmful to public health so that the marginal sociable cost(MSC) is exceed the marginal private cost(MPC). The ideal of production reaches Qs, MSB is equal to MSB. The companies will produce goods at Qp, where MPB is equal to MPC. The surplus of development not only does not promote the general public welfare but also causes more pollutions to the surroundings. Because of this, the market goes inefficient.

b) Positive Externalities

The positive externalities such as the provision of education and healthcare can cause the marginal sociable benefit(MSB) of consumption to go beyond the marginal private benefit(MPB) in line with the diagram below

In a free market, the use will be at Qp where the private gain equals to the private cost. However, this is socially inefficient because the communal benefit is go beyond to the sociable cost. Therefore, that is under-consumption(Qs-Qp) of the positive externality. The interpersonal efficiency will occur at Qs where in fact the communal cost equals interpersonal benefit.

c)Merit and Demerit goods

Merit good is a good that folks do not appreciate its true profit like the people underestimate the benefit of education. The types of merit goods are education and health care. These goods will often have positive externalities. Therefore, you will see a under-consumption of merit goods in a free of charge market.

Demerit good is a good that folks do not understand the costs to do something such as smoking and drugs. These goods usually have negative externalities. Therefore, you will see over-consumption of demerit goods in a free of charge market.

d)General public goods

The private areas in free markets cannot profitable source to consumers general public goods that are needed to meet people's demand. So the public goods are generally provided by federal.

e)Monopoly Power

Market that controlled by monopoly can cause under-production and higher prices than would are present under condition of competition.

f)Factor immobility

Factor immobility may cause unemployment hence profitable inefficiency.

When market fails, the market will get caught in position of inefficiency. It could cause unfair circulation of income and property to the public. Many firms raise the quantity of goods supplied in order to earn more profit. It could cause the air pollution in the surroundings as the organizations are not happy to protect environmental surroundings whenever they produce goods. Besides that, unemployment will arise because of the exclusion of labor by the machines when the businesses have the ability to improve the production. You will see also an undersupply of public goods. The private areas are not prepared to produce public goods as the consumers do not need to pay for these goods in order that they will not earn profit from providing the general public goods.

To address these general population issues, the federal government will perform some policies to solve the market failure such as imposing fees on negative externalities.

In the diagram above, the marginal cultural cost(MSC) of creation will exceed to the marginal private cost(MPC). The government imposed the fees to the retailers and the imposition of fees will boost the production cost of the vendors. Then, the resource curve(PMC) will change to the left. The number of production will lower from Qp to Qs where the optimum end result is and the cultural welfare will be maximized.

New Mexico Legislature is supposed to raise the state cigarette tax from 75 cents to $1. 66 per load up this year. The purpose of imposing the taxes is to reduce the tobacca use and save lives. The increasing of duty will discourage people from smoking. Increasing the cigarette duty is one of the very most effective ways to reduce smoking, especially among kids. (Earthtimes 2010, Earthtimes, looked at 14 March 2010, )

From the diagram above, the production of tobacca of marginal social cost(MSC) is go over to the marginal private cost(MPC) and the output of tobacca of the vendors is at Qp. New Mexico Legislature imposed the cigarette taxes to the productivity of tobacca of vendors. So that, the supply curve(S=PMC) of tobacca will change to right. The output of tobacca will lower from Qp to Qs as the tobacca tax will boost the cost of creation of tobacca. Because of this, the resource curve of tobacca will proceed to left and equals to marginal sociable cost(MSC). Currently, the optimum outcome of tobacca reaches Qs. The imposition of cigarette tax will certainly reduce the result of tobacca and discourage people from smoking.

Taxes on negative externalities will improve the revenue for the federal government and reduce the pollution of environment.

The second insurance plan that can get over the market failure is to provide subsidy on positive externalities. The government provides subsidy to the firms to pay part of cost to them to encourage more production.

From the diagram above, the production of marginal social benefit(MSB) is go beyond to the marginal private benefit(MPB). The federal government provided subsidy(P2-P1) to the firm to diminish their cost of creation. As a result, the organization will boost the end result from Qp to Qs. Then, the social welfare will be maximized.

Malaysia government projects to give a subsidy of RM30bil to improve primary and secondary university education nationwide which is one of the programs of Budget 2010. (Communicating 2009, Talking, viewed 15 March 2010, )

From the diagram above, when our administration provides a subsidy of RM30bil on education, the operating cost of university will lower. Then, the institution will have sufficient capital to generate more facilities and provide more educational plans from Qp to Qs for the students. The students will get more benefit from studying. At this moment, the communal welfare could keep increasing till the marginal sociable benefit(MSB) equals to marginal sociable cost(MSC).

The third insurance plan is to improve the property right. This will happen when the federal government gives the property rights to certain people such as the fishermen could get the property rights to a river. When negative externalities happened, the owners of property could sue a company who caused harm or pollution including the anglers can sue a substance stock which polluted the river. It may charge some cultural costs to the chemical substance factory. The government pursued this plan to reduce the air pollution of environment so the negative externalities could be eliminated.

In addition, the government will also impose the regulations and legislation to prohibit the unhealthy behaviour of men and women such as legalizing this for smoking and banning on dui. The regulations must be simple and easy to understand to the public. Due to a cutting down in negative externalities, the marginal cultural cost will reduce. So that, imposing the regulations is also a policy to overcome the marketplace failure.

For example, it is unlawful in New Zealand to market cigarettes and tobacco products to folks aged under 18. Additionally it is illegitimate for a person over 18 to give a person under 18 tobacco or tobacco products in a general public place. Another example is sales of tobacco to the people under the age of 18 are unlawful in every Australian expresses and territories. The goal of legalizing the smoking by both governments is to lessen the intake of tobacca. It may help to reduce the negative externalities for improving efficiency of the marketplace.

Finally, the other plan is to give the air pollution permit. The federal government can give a pollution permit to a company to limit his output. The more the stable produce, the more polluted the surroundings is. Therefore, the marginal sociable cost could keep increasing and market failure will occur. The federal government will give the air pollution permit to the company such as restricting the firm to produce only 100 products skin tightening and per year. Because of this, there is an motivation to pollute less and the negative externalities will be removed.


The public guidelines implemented by the federal government can successfully solve the market failure. The primary causes of market failure is the externality. It could split into negative externality and positive externality. Federal government will impose the tax to the businesses to diminish their outcome as every product of good they produce may cause the air pollution of environment. The implimentation of the public plan can decrease the pollution of environment but also to get rid of the negative externalities for effective market.

Secondly, the federal government will also provide subsidy to the firms. With this coverage, the development cost of the firms will reduce and their outcome will increase. The market will be productive as the subsidy on positive externalities forces the marginal public cost equals to the marginal cultural benefit. Thirdly, the federal government will apply the insurance policy of changing the house rights. Giving the property rights, who owns the house can sue a company which caused pollution with their property such as the lands. It could help to reduce the pollution of the environment and eliminate the negative externalities. So that, the market inability can be get over.

The federal government will also impose the laws and regulations to prohibit people from the unhealthy behaviour such as smoking and taking drug. The implementation of this policy can effectively raise the social benefit. So that, the market inability will turn into a competent market. Lastly, the federal government will also give the air pollution permit to the company. This plan can limit the result of skin tightening and of the company. It can reduce the negative externality of polluting of the environment. As a result, the market will be productive by lowering the negative externalities.

For a reliable market, the government will implement the public regulations when market inability occurred although the government needs to spend a high cost to them.

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