Various economic concepts are related to market failure and externalities. Market failure is described as the situation that ensues when the pricing mechanism that guides the free market fails to take into consideration all the different costs and benefits that are requisite for the production and consumption of a good (Lumen Learning, n.d.). There are various causes of market failure amongst them externalities, factor immobility, and abuse of monopoly power (Lumen Learning, n.d.). Externalities are described as the costs and benefits that impact third parties without their informed decisions or actions (Lumen Learning, n.d.). Externalities can be either positive or negative. Positive externalities cause positive impacts while negative externalities cause negative implications for the third party.
I acquired different lessons regarding the economic concepts of market failure and externalities. One of the lessons is that both positive and negative externalities cause market failure when their costs and benefits are taken into consideration. The market failure would occur due to the underproduction or underconsumption that would follow (Lumen Learning, n.d.). For example, when the producer bears the costs of a negative externality, there might be an underproduction of the goods or services. Also, if the benefits derived from positive externalities are accounted for by the third party, the underconsumption of the goods or services may occur.
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Another of the lessons that I gained is that various interventions can be made to prevent market failure. Often, the interventions are made by the government, and they include legislation, taxation, subsidies, and tradeable permits (Lumen Learning, n.d.). Some of these interventions have had an impact on my personal life. An example is the government’s intervention to offset the positive externalities of education by offering subsidies and grants to public colleges and universities (National Bureau of Economic Research, n.d.). Education creates positive externalities by providing the society, a third party, benefits such as intelligent members, and reduction in crime. If the society were to account for these benefits, education as a service would be under-consumed. However, government subsidies result in higher enrolments in public institutions (National Bureau of Economic Research, n.d.). Another intervention that would cause different experiences is the introduction of taxes on petroleum products to cater to the negative externalities of pollution on society. In the United States, the federal and state governments impose such taxes, which affect the price of fuel (US Energy Information Administration, 2020). From these experiences, it is clear that market failures can be reduced through various regulations, e.g., internalization of externalities, which would help optimize economic efficiency.
References
Lumen Learning. Introducing Market Failure | Boundless Economics . Courses.lumenlearning.com. Retrieved 6 June 2020, from https://courses.lumenlearning.com/boundless-economics/chapter/introducing-market-failure/ .
The National Bureau of Economic Research. State Education Subsidies Shift Students to Public Universities . Nber.org. Retrieved 6 June 2020, from https://www.nber.org/digest/dec03/w9720.html .
The National Bureau of Economic Research. State Education Subsidies Shift Students to Public Universities . Nber.org. Retrieved 6 June 2020, from https://www.nber.org/digest/dec03/w9720.html .
