Micro-economics: Market failures & Externalities:
Market failures & Externalities:
Occurs when left to the free market there is spill over benefits from production and consumption.
Positive externalities create 3rd part spillover benefits. the result is that the social benefit of production/consumption is greater than the private benefit.
External benefits might be in the form of - lower costs for other parties. increased revenues/ profits for other parties. increased utility / satisfaction for other parties.
Positive externalities are associated with merit goods and services. As with negative externalities, discussion of what counts as a positive externality and the value attached to it, will nearly always involve a value judgement.
For positive externalises the social benefit > Private benefit
positive externalities can lead to under consumption and market failure. government intervention is then needed to correct the market failure the takes the form of-
Rules and regulations - minimum school leaving age
Subsidy to reduce price and encourage consumption
Increasing supply - government building of council houses to increase stock of good quality housing
A pollution tax increases the marginal private cost causing a fall in demand
Some economists argue that revenue from pollution taxes should be 'ring-fenced' and allocated to projects that protect or enhance the environment
One approach is to impose a tax. this is known as "making the polluter pay"
For example, money raised from a congestion charge might be allocate towards improving mass transport services
Revenue from higher taxes on cigarettes might be used to fund care health programs.
when left to the free market the good or service is over consumed and imposes external costs on third parties ( spill over costs )
Negative production externalities include pollution generated by a factory that imposes costs on others
Negative externalities causes social cost > private cost
Negative externalities can form from both production and consumption of products. Market failures arise as people fail to take in to account the cost
Pros of the pollution taxes:
- internalises the externality and therefore makes the polluter pay. utilises the price mechanism to change incentives and choices. raises tax revenue which might then be used to dress other market failures
Cons of the pollution taxes:
- low price elasticity of demand- tax may not change behaviour. risk of tax evasion and tax avoidance. may hit lower income families most and cause some social unrest.
This occurs when there is an inefficient allocation of resources in a free market.