Economics - Market Failure

In: Business and Management

Submitted By sabrinaj123A
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Environmental Market
Failure

Negative Externalities
Costs imposed on a 3rd party not involved with the consumption or production of the good (the external cost)
 Divergence between private and social cost
 MSC=MPC+MEC
 The MEC = the negative externality  The free market price is less than the optimum price leading to over consumption
 Welfare loss

Q: The market generated quantity
(where privates crosses private)
Q1: The optimum quantity
(where social crosses social)
Over consumption of Q-Q1

Unequal Distribution Effects


Citizens in poor countries are more likely to be affected by the consequences of global warming that those in rich countries



E.g. drought/flooding



They are also a lot less likely to have consumed the goods and services which caused the global warming



And a loss less able to protect them selves e.g. through insurance policies



There are inequities between those who contribute to global warming and those who suffer from it



Citizens of developed (polluting) countries pay less for their goods and services than the social costs of their production 

MSC=MPC+MEC

Government Intervention to correct
Environmental Market Failure
2 main types:
 Market based measures
Designed to modify the price mechanism using strategies such as taxes and subsidies
 Government regulation
Sometimes referred to as “Command and
Control”, designed to create incentives for firms to reduce harmful emissions, such as pollution permits which allow pollution to a certain level

Environmental Taxation
A tax placed on the producer of a good or service which is deemed to have a negative impact on the environment
 Designed to “internalise” the negative externality by increasing the private cost of production
 Tax aims to increase the private cost until it equals the social cost…...

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