Market failure?

[hdxx]

Why do externalities lead to market failure?

[S200]

Positive Externalities; Someone is getting a service/product for nothing --> Company isn't getting paid for that thing --> Unwilling to continue production --> Govt subsidises it --> More money paid out by government to corporations...

Negative Externalities; The production of a good/service creates pollution --> Fuss raised --> Company has to clean up it's act --> inefficient use of resources/raises production cost.

If either of these impact just on company, it biases the market either for or against that firm, creating unequal competition, and hence there is market failure.

Someone else could prolly refute/confirm this, 'cause Eco is my weakest subject.

[Chelsea f.c.]

Externalities are like a byproduct of a transaction we're positive is good and negative is bad. The idea of market failure is that given perfectly competitive markets where individuals maximise utility there won't be enough quantity of the good traded so as to maximise social welfare... best of explained in two examples =)

My first year micro lecturer (I'm now 4th  ) explained education had positive externalities as more educated people would lead to a better democracy through more insightful conversations. However, if education was not subsidised many could not afford it so if the socially desirable outcome was a lot of educated people we would only have a few, which means governments can step in to increase the market outcome to the socially desirable.

Another, energy companies who burn coal pollute thus there is a negative externality, where a tax could decrease pollution and or increase innovation (idea of credits) thus decreasing the amount of energy to the socially desirable level.

[lifeisgood]

this is what I would generally answer for any question:
positive exteranalities
Market failures occur when markets across the economy, left without government intervention will lead to an inefficient allocation of resources and living standards are not maximised. They often occur when there is an over-production of goods such as de-merit good (eg alcohol, weapons, drugs all of which is detrimental to society or pose as societal cost) and an underproduction of public good and merit goods (eg education, hospitals).”

Firms will only consider the potential revenue they can extract from customers and compare this with the cost associated with the production and will not consider the costs imposed on society.
 In this case of positive externalities private costs are greater than social benefits (meaning that external benefits do not reduce private costs)and so producers will generally under allocate resource to the production of goods and services that have positive externalities. All positive externalities in consumption or production will ultimately lead to an inefficient allocation of resources where very few resources would be allocated to the production and consumption of the {relevant goods or service} and the socially optimum allocation of resource (allocative efficiency) would not be achieved.
negative externalities
it would look at its private cost relative
firms will look at its private costs relative to the price that their product can be sold in the market and not consider the costs imposed on society.
given that for negative externaties private costs are lower than social benefits, producers will generally overallocate resource to the production of these particular goods and services (in order to gain maximum profits) ....will negativley impact society.
hoped that helped.
 

[hdxx]

Thank you!