Market Failure
Market failure is a study in economics in which economists try to identify reasons for the slow growth of the market and its poor performance. There are many types of market failures, some of the factors that allow the market to fail are the tragedy of the commons, free-rider problem, demerit goods, inefficiency of a market, information asymmetry, monopoly and externalities. All of these contribute to a certain inefficiency in the market. For this blog post, externalities will be the main focus as it usually affects most people inside and outside of the market.
externalities
A market should have a succession of economic activity for it to achieve economic growth and stability. For this to happen, producers and consumers must both benefit from each other. The products produced by the producer will be consumed by the consumer. Some people think that this is all that happens in the market, little do they know that by buying certain products, they produce externalities. Externalities are the effects of the consumption of a product to a third party. There are two kinds of externalities, negative externalities and positive externalities. Government intervention are associated with externalities as these externalities bring upon problems to the market or the society, and the government is there to limit these problems.
negative externalities
Negative externalities are the harmful or dangerous effects of the consumption of goods to a third party. An example of a negative externality is buying cigarettes. This is because buying cigarettes and using them would contribute to air pollution in that area which in turn affects the passersby. Second hand smoke emitted by this is also a cause of the externality in which people will get sick because of it. Negative externalities happen because of the producer's lack of concern for the people that will be affected by their product. Negative externalities are often limited by the government for the good of the society. When the negative externalities get out of hand, the government steps in and intervenes with the product producing the externalities as they are usually over producing and over consuming respectively. The government does this by taxing these products that can potentially harm others in any way. This reduces the spending of people on these products in which it also lowers the negative externalities. We can usually see this in externality graphs which shows the social cost being greater than the private cost. The reason for this is that when an individual smokes, he does not get affected as much by the smoking as it is his/her choice to smoke, but for others, his/her smoking is affecting them negatively as he is indirectly harming them. Thus, it can be said that the social cost is evidently greater than the private cost.
positive externalities
Positive externalities are the positive effects of the consumption of a good. An example of this is that of education, as education brings countless benefits to the society. When a person studies, he/she can share his/her knowledge to people in which they will also share this knowledge to others. As we can see, education is really important in society. So like negative externalities, the government can also intervene in situations wherein positive externalities are involved. They are going to subsidize these products or services that bring about many positive externalities so that the product will be able to generate the most benefits possible. This is because some of these products are taken for granted and are treated like "side" products. They are under consumed and under produced products that need subsidies to be able to continue efficient production. The externality graph for this will show that the social benefit of this particular product is greater than the private benefit. This is because as seen in the example of education, one person studies and shares it to others. The person benefits from studying, but those people he taught would benefit more as they learned from the other person who studied
issue invOlving negative externalities
After talking about externalities, let us discuss an issue regarding externalities. We all know that drinking alcohol is a cultural norm in most countries. People drink alcohol when they are feeling happy, sad, depressed, lonely and confused. Given this, it is inevitable that the consumption of alcohol will stay stable as long as the supply is there to satisfy the demand. Statistics show that in 2009, beer sales reached 471 billion dollars globally. It is expected to increase by around 8 percent in 2014-2015. Wine sales also increased and is expected to further increase in 2015 to exceed 26 billion liters. We can see by the statistics that the consumption of alcohol is increasing every year. Alcohol sales in China and the Middle East are also expected to increase significantly as they are entering a unique market. It is a fact that alcohol can cause addiction and sickness; this can be a reason as to why people keep buying alcohol even if the government tries to limit sales through a heavy taxation of the product. It is said that demand for alcohol decreased after its taxation, but it is not the significant decrease that would help lessen negative externalities of alcohol. One of the most prominent externalities brought by alcohol consumption is deaths and accidents by DUIs. Reports suggest that for a single day in the United States, around 30 people die because of accidents caused by driving under the influence. In 2013, 31 percent of all deaths related to traffic was because of DUIs. Among these deaths, around 200 children are included. Yearly costs of these accidents cost around 60 billion dollars according to the CDC (Center for Disease Control and Prevention). This include the clean up of the wreckage left by the accident, hospital fees, morgue fees and compensation for the victims. As we can see, the externalities caused by drinking alcohol can be very disadvantageous to both the government and the society. The government can try to limit these externalities by taxing alcoholic drinks higher than other products. The government can also regulate the manufacturing of beer and wine by reducing the alcoholic content of the beverage. Alcohol is a demerit good, therefore negative externalities are inevitable. This validates the heavy taxation of alcohol in most countries. People should not solely rely on the government to reduce these negative externalities; people concerned, should also be more aware of the consequences that their actions may give. NGOs and awareness groups also play a role in reducing this externality, one such group is the CDC in which they inform people of how drunk driving is a very serious issue. It may not seem serious as accidents that involve this don't happen at quick notice, but when taking into account the statistics of the death rate due to DUIs, one may consider being more cautious with the consumption of alcohol.