Market failure is known as the inefficient allocation of goods and
services in which there is an outcome in which one may profits but another one
incurs losses. Several problems are created in attaining the pareto optimality
and maximisation of social welfare. The significant types of this market
failures are public goods, monopoly power and negative externalities.
will demonstrate how negative externalities are a form of market failure.
externalities can be defined as the cost of suffering by a third party as a
result of action taken by a producer and a consumer which is the first and the
of negative are consumption of demerit goods like tobacco and drugs, Pollution
resulting from a thermal power plant, excessive use of pesticides and etc.
power plant fired by coal produces lots of electricity to power entire cities
but comes at a cost of massive amounts of air pollution affecting the people
living near the plant adversely since they breathe air which is full of harmful
level of efficiency is not attained.
There are some nations like Sweden, Norway and Denmark which have
put a lot of effort in making lives of the people better but there is still a
lot more to do for most other nations. The welfare loss created by these plants
is massive and its solution can be compensating the people living around it.
Government’s intervention could of great assistance as well. Piguvian Tax can
be imposed in more polluting industries and incentives like subsidies to be
given to more eco-friendly industries. The government should impose tax in a
way which allows producers to attain a social marginal cost. This could reduce
the output till the desired level. The government can regulate to produce goods only till optimum level by
setting up quota. The government can also ask polluting
industries to compensate the people if they are being harmed by the industries
in any way. Carbon tax can be imposed on these industries and price ceiling and
price flooring taken up. People living in nearby locations should be
compensated to move somewhere where there is a better quality of air and life.
pesticides is another example of negative externalities. Chlordecone, a pesticide
was used in the Caribbean islands of Martinique and Guadeloupe France to kill
the BANANA WEEVIL. It was legal at that time and it was used to increase
profits and reducing costs for the plantation owners.
the chemical benefited the farmers, it washed off the land into rivers that
flowed into the coasts where it damaged the freshwater prawn farms in the
mangrove swamps which were rich with lobsters and fisheries. The Fishermen’s
lives were affected adversely all those who ate the fishes fell ill.
The usage of
other methods to kill BANANA WEEVIL was more expensive than chlordecone and the
profitability for the farmers was in using the pesticides even though at the
cost of other fishermen. The pesticide was proven to be harmful and thus banned
by various countries including France after some time.
were not able to bargain among each other and come to a settlement, the government
could step in and limit the usage of Weevokil pollution by reducing the amount
of pesticide used. The production of banana was not the problem for the
fishermen. The problem was the pesticide and so the government could have
imposed tax on the pesticide in way it is used less. The government could have
also asked the farmers to compensate for the losses of the fishermen whose
lives were adversely affected.
Hydroelectric Dams is another example of negative externality. The cost
hydroelectric dams pose on the environment is tremendous. Local animals and habitats
are destroyed. Dams have also resulted in flooding at many areas. Millions of
people have been displaced across the world due to the construction of dams.
The Plant life that is submerged in water ultimately results in the production
greenhouse gasses like methane.
all these negative effects of Hydroelectric dams, they provide us with
continuous electricity which is essential for our day to day lives.
government can opt for other methods for producing electricity. The government should
also compensate the people who would be displaced by the construction of the
dam by providing them sources of income and housing at a different location.
The usage of
antibiotics has also resulted to an external effect that is negative. Since its
discovery in 1928, Antibiotics have saved millions of lives. Fatal diseases are
now treated easily. They are also very cheap to produce due to mass production.
However, the excess and improper use of antibiotics has led to a post
antibiotic era in which the bacteria are becoming resistant to current
antibiotics due to which we will much more than we are presently saving and the
implications will be devastating. This is an example of social dilemma in which
something done by an individual in order to obtain his or her own objectives
results into something harmful for someone else. The birth of antibiotic
resistant superbug is a negative externality which can be cured by several
actions which will be discussed later on.
these examples we can observe that welfare loss has been created for the
society and the government has the authority and potential to minimise the
social welfare loss. The Pareto efficiency has not been attained in these
examples. The governments intervention is necessary
developing nations like India and Brazil, it is important to opt for cheaper
methods of production in the short run in order to have enough funds for future
in which they could opt for more ecological methods of production. A coal fired
plant used for producing electricity is considered cheaper for countries with
tremendous amounts of coal despite of the future costs which are along with it