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Word Count: 1,604
Why do markets fail to generate socially desirable outcomes Markets are not infallible They can fail to organise economic activity in a socially desirable fashion Markets failure are due to social inefficiency and inequity In the real world the market rarely leads to social efficiency the marginal social benefits of most goods and services do not equal the marginal social cost Part of the problem is the existence of externalities part is a lack of competition and part is the fact that markets may take a long time to adjust to any disequilibrium given the often considerable short-run immobility of factors of production Lets analyse the types of market failure Externalities The market will not lead to social efficiency if the actions of producers or consumers affect people other than themselves These effects on other people are know as externalities they are the side effects or third-party effects of production or consumption Externalities can be either desirable or undesirable There are four major types of externality 1External cost of production MSC gt MC The marginal social cost MSC of chemical production exceeds the marginal private cost MC For example when a chemical firm dumps waste in a river or pollutes the air the community bears cost additional to those borne by the firm The problem of external costs arises in a free-market economy because no-one has legal ownership of the air or rivers and can therefore prevent or charge for their use as a dump for waste Control must therefore be left to the government or local authorities 2 External benefits of production MSC lt MC Marginal social cost is less than marginal private cost One of the example of external benefits in production is that of research and development If other firms have access to the results of the research then clearly the benefits extend beyond the firm which finances it The firm only receives the private benefits it
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