ATAR Notes: Forum
VCE Stuff => VCE Business Studies => VCE Subjects + Help => VCE Economics => Topic started by: sum1 on May 08, 2013, 07:25:32 pm
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Hey guys!
Just a bit confused on the whole externalites thing as to how it represents or is referred to as market failure. Can someone please explain it in a nut shell? Greatly appreciated!
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Market failure is anything that causes the market system not to allocate resources efficiently.
Externalities are a transaction between two parties or action that somehow affects a third party which has nothing to do with the original transaction or action.
There are both positive and negative externalities. For example a positive externality can be a nice garden that improves neighbours non-material living standards and improves their neighbourhood. A negative externality is something like pollution from a factory which is harming the environment.
It is a market failure for a few reasons (negative externalities are the main market failure while positive externalities are actually good for efficiency):
Economic agents don't consider externalities when producing consuming as they don't really have a reason too. I.e. positive externalities may not occur so often as people don't really pay attention to effects on third parties and negative externalities could often more often for the same reason.
Negative externalities can cause a wastage of resources as to fix the problem caused by them it is necessary to allocate resources to fixing them when those resources could have been used to improve the living standards and satisfy needs and wants (not just fix problems relating to externalities). E.g. More research funds spent on how to stop or reduce pollution when alternatively it could have been spent on research on how to increase life expectancy of people.
Governments have tried to fix this issue by adding extra taxes and other restrictions to things which cause negative externslities (e.g. Last years introduction of the price on carbon) and provide rebates for things which cause positive externalities (rebates on solar energy thingos, water tanks etc.).
Hope that made it a little easier to understand if someone has anything more to add, I too would like to know :)
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It is a market failure for a few reasons (negative externalities are the main market failure while positive externalities are actually good for efficiency):
It's important to understand that a + externality is also a form of market failure
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It's important to understand that a + externality is also a form of market failure
Is That what I mentioned in the paragraph below what you quoted, talking about how positive externalities tend to not occur enough?
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+ externality is a market failure as it is results in underproduction and/or is inefficient allocation of resources b/c there are not enough incentives for firms to produce goods/services that entail + externalities mainly b/c they can't put a price on the full social benefit i.e. research and development w/o govt funding is a + externality but will be underproduced unless they are subsidised/given research grants
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Thanks for the help guys :) also just wondering, how and why is there underproduced and overproduced positive and negative externalities? What does it mean if its underproduced? Are resources not allocated efficiently hence underproduction thus a market failure? And vice versa for negative externalities?
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Thanks for the help guys :) also just wondering, how and why is there underproduced and overproduced positive and negative externalities? What does it mean if its underproduced? Are resources not allocated efficiently hence underproduction thus a market failure? And vice versa for negative externalities?
positive externalities is a form of underproduction as the social benefit exceeds the economic benefit producers can extract from it, hence reducing incentive for them to produce this good or service
negative externalities is a form of overproduction because supplers producing the negative externality are not required to pay for the cost to society (i.e. if they were required to pay for the negative effects to 3rd parties such as the carbon tax, they will naturally produce less)
re allocation of resources, not enough resources are being allocated to producing positive externalties (for reasons mentioned above), while too many resources are being allocated to producing negative externalities, and hence is not an efficient allocation of resources