• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

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

Extracts from this document...

Introduction

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. ...read more.

Middle

Negative externality of production Price of MSC MPC chemicals Welfare loss Negative externality P* P1 MSB Q* Q1 Quantity of chemicals Because the spilled toxic chemicals in the article are harmful to the local people, the Marginal Social Cost, MSC, is much greater than the Marginal Private Cost, MPC. The MPC and any external costs together make up the MSC. However, as the MPC is below the MSC, because there is an extra cost to the society as a whole that is caused by the pollution, a welfare loss is created, making this situation an example of a market failure. Moreover, in a negative externality, the quantity produced, Q1, and the price of the good, P1, are greater than the optimum quantity, Q*, and the optimum price, P*, which demonstrates that the chemicals produced by the firm are an overproduced demerit good. ...read more.

Conclusion

Companies have to spend less money on health and safety measures, therefore have more money available to procure other factors of production. Also, if these firms are accused of wrong doing, they can bribe their way out of trouble. Because of such exploitations, situations like the pollution caused by the Biaoxin Chemical Company occur, in which the company is just concerned with making a profit and are unperturbed by the social costs they cause. To prevent such exploitations, developing countries need to spend money on creating a tighter legal structure. However, this might prevent foreign companies from entering the country which would lead to a loss of job opportunities for the insidious population and lead to a decline in the sharing of technical know-how with the developing nation. However, these companies represent a greater social cost than the benefits gained from the firms are worth and ways to reduce the exploitations therefore have to be found. 1 'Two arrests over water contamination', The Economic Times, 23/02/2009 2 ibid ?? ?? ?? ?? ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our International Baccalaureate Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related International Baccalaureate Economics essays

  1. Peer reviewed

    Economics Article Commentary. London gets EU reprieve over air pollution. The air pollution is ...

    3 star(s)

    Consumption would now reach the socially efficient level and government will receive revenue that it can use to pay for the external cost. However, the inelastic of demand may means taxes do not manage to reduce quantity demanded very much and so, while government revenue is raised, quantity demanded does no fall to socially efficient level.

  2. IB Economics Commentary on Market Failure

    will exceed market price and overproduction and overconsumption will occur , causing a misallocation of resources . In order to account for this marginal social cost, the legislative leaders have considered imposing a tax double the previous amount, to remove this misallocation of resources.

  1. Market Failure IA Commentary. This article is about the price of cigarettes in Macao ...

    "Adults would still be able to afford it, many would quit and for sure it would put the cost of cigarettes beyond reach of the youth which is the object of excise taxation," he stressed.?He slammed Macau for having "one of the least effective anti-tobacco laissez-faire attitudes" even though it

  2. Alabama's Cigarette Tax Article. The basic economic problem in this article is negative externalities. ...

    Hubbard said the tax increase on cigarettes would be a fair way to support Medicaid, as part of its spending goes to fight health problems caused by smoking. "It's not an unfair tax. This tax on people who are engaged in activities that are worth every taxpayer," he said.

  1. Economics Extended Essay - To what extent has the market for paintings in South ...

    In fact, some dealers are guilty of holding on to works of artists they are promoting - only to sell them when prices skyrocket. "Gallery dealers, both existing and new corporate entrants, will face the same overriding problem of sourcing," agrees Kapoor.

  2. Essay on negative externalities

    The welfare loss will be reduced. For example, let us take the example of the car factory of General Motors Company. The GMC company was producing at Qp and thus causing a welfare loss shown by the shaded area. Then , a tax was imposed.

  1. Internal Assessment: Opportunity Cost

    Furthermore, according to the article, the government should use $700 billion to bailout the banks in order to prevent further financial crises. As a result, in short term, there would be some advantages and drawbacks. For instance, it would prevent the banks from bankruptcy - satisfying the banks.

  2. Explain the Main Sources of Market Failure that Can Occur in the Market System ...

    But this essay will focus on other three sources of market failure; externalities, missing market and lack of competition. First, externalities make a difference between private and social costs and benefits. Externalities occur when a third person who has nothing to do with the decision to practice is affected by cost or benefit.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work