Karen Monether                                                Y4126938                                        TMA02 / Part b

  1. Explain how climate change may be seen as an example of market failure?

2) Describe possible ways of limiting the impact of market failure on public goods.

Climate change refers to a long-term global environmental alteration within natural resources, such as, weather patterns and greenhouse effects,  influenced by our economic system. By characterising market economy , I intend to establish its impact on the environment and discuss the ways in which changing climate affects economic activity, resulting in market failure. In the second part, I will examine the ways in which action can be taken to limit the impact of economic activity within market economies on public goods.

Market economy refers to economic growth in which resources allocated through exchange in markets consist of buyers and sellers known as economic agents, such as firms, charities, and individuals, which have the  right to use and dispose of their property as they like. They trade goods and services by demand, which determines prices and wages influenced by competitive market forces (Hinchliffe and Woodward, p. 82,83). Consequently, in order to survive, economic agents tend to make decisions of resource usage based on private costs and benefits to themselves, overlooking the critical affects of  social costs followed by their actions, known as externalities. For example, when two businesses sell the same product, they compete for customers by lowering the costs of  production, using the cheapest resources available, so their profits will grow. Many factories establish themselves in developing countries where they use cheap labour, avoid paying environmental control costs, such as waste clean up, dump  chemical waste into rivers and pollute the atmosphere with gases, which are called environmental externalities. On one hand, consumers benefits from low costs products but on the other, production methods cause erosion of natural and social recourses. (Hinchliffe and Woodward, 2004, p. 99 & 100).  

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The Stern Review, written by economist Nicholas Stern for the British Government, conveys the affects of economic activity on the environment, corroborating that “climate change is a result of externality associate with greenhouse-gas (GHG) emissions, it entails costs that are not paid for by those who created the emissions…and threatens to be the  greatest and widest-ranging market failure ever seen“. The release of GHGs emissions into the atmosphere causes global warming, which has severe impacts on the environment.

For example, warming instigate meltdown of glaciers cause sea levels to rise, resulting in heavier floods where millions of ...

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