Essay On Market Failure

Submitted By Wu-Whoo
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Pages: 3
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Market Failure occurs when the Competitive Market System:

(1) Produces the “wrong” amounts of certain goods and services. - This type of market failure results from spillovers or externalities.

(2) Fails to allocate any resources whatsoever to the production of certain goods and services whose output is economically justified. - This type of market failure results from public goods.

Both of kinds of market failure can be corrected through government intervention.

*Allocate = to distribute with a purpose*

Spillover Costs

Spillover Costs are costs or after-effects of production or consumption that negatively affects a third party without providing compensation.
Economic Effects:
Costs determine the position of the firm’s supply curve
Supply curve will lie further to the right in Spillover Cost situations.
This creates an imbalance in that the price of the good is too low and the supply is too great to efficiently allocate.
Market failure would occur as a result of over-allocation of resources.

Government Intervention on Spillover Costs

Our government approaches spillover costs in two ways; both ways are designated to internalize spillover costs, or in other words make the company that caused the spillover cost pay retribution.
Legislation:
(Air & Water pollution) The most direct form of action the government can take on this kind of spillover costs is the prohibition or limitation of pollution. This would force companies to pay for proper disposal of potential pollutants.
The government can also request that permits be purchased in order to pollute. This allows environmentalists to go after these permits as well; thereby limiting the amount of permits that companies who intend to pollute can buy.
Specific Taxes:
A more indirect way is taxes.
Taxes would be a determinant of the firm’s supply curve, and specific taxes imposed by the government may decrease the output of products by the firm – causing less pollution.
The amount of the tax imposed by the government would equal the amount of the spillover cost that occurs through production.
This tactic would shift the company’s supply curve back to the left, reducing equilibrium output and getting rid of over-allocation.

Spillover Benefits

Production/consumption of certain goods may result
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