Economics Commentary- Market Failure. In the article, the negative externality was the spilling of toxic chemicals that caused large-scale environmental pollution[1]. The full cost of this polluting is not reflected in the market prices of

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Commentary 1

        Negative externalities occur, when the production or consumption of a good or service creates an external cost that is damaging to a third party. These externalities produce costs to the society and environment, which are not reflected fully in the free market prices. The producers or consumers that cause these side effects impose those costs on others not responsible for instigating the effects, thereby leading to a market failure. For example, if a paint factory releases toxic fumes that are harmful to the local populace, then the social costs outweigh the private costs (costs born by a firm or an individual from the production or consumption of a good or service) and factors of production that the firm has to pay. The fumes emitted may cause cancer or respiratory problems in the people living nearby, thereby creating a larger social cost. Goods with a negative externality are called demerit goods. In a free market economy, demerit goods are overprovided, and therefore overconsumed. Cigarettes, for example, are demerit goods, as smoking has a negative effect on a third party, like the consequences of second hand smoking.

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        In the article, the negative externality was the spilling of toxic chemicals that caused ‘large-scale environmental pollution’. The full cost of this polluting is not reflected in the market prices of the goods that the Biaoxin Chemical Company produces. Moreover, even though the company does offer job opportunities to the local population, the company causes a greater social cost to the people than the social benefit that can be gained through the income of the jobs. Many people have already been affected by the welfare loss that the polluting, which has been going on for several years, has caused. ...

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