Question

Why do negative externalities, monopoly, and asymmetric information result in bad economic outcomes? What can we do to fix these?

Answer 1

Answer :- Yes, Negative externalities, monopoly, and asymmetric information result in market failure or bad economic outcomes.

One easy-to-illustrate market failure is the public goods problem. Public goods are goods or services which, if produced, the producer cannot limit its consumption to paying customers and for which the consumption by one individual does not limit consumption by others. Public goods create market failures if some consumers decide not to pay but use the good anyway. National defense is one such public good because each citizen receives similar benefits regardless of how much they pay. It is very difficult to privately produce the optimal amount of national defense. Since governments cannot use a competitive price system to determine the correct level of national defense, they also face major difficulty producing the optimal amount. This may be an example of a market failure with no pure solution.

We can fix this by many potential solutions for market failures. These can take the form of private market solutions, government-imposed solutions, or voluntary collective action solutions.

Asymmetrical information is often solved by intermediaries or ratings agencies such as Moody’s and Standard & Poor’s to inform about securities risk. Underwriters Laboratories LLC performs the same task for electronics. Negative externalities, such as pollution, are solved with tort lawsuits that increase opportunity costs for the polluter. Tech companies that receive positive externalities from tech-educated graduates can subsidize computer education through scholarships.

Governments can enact legislation as a response to market failure. For example, if businesses hire too few teenagers or low skilled workers after a minimum wage increase, the government can create exceptions for younger or less-skilled workers. Radio broadcasts elegantly solved the non-excludable problem by packaging periodic paid advertisements with the free broadcast.

Governments can also impose taxes and subsidies as possible solutions. Subsidies can help encourage behavior that can result in positive externalities. Meanwhile, taxation can help cut down negative behavior. For example, placing a tax on tobacco can increase the cost of consumption, therefore making it more expensive for people to smoke.

Private collective action is often employed as a solution to market failure. Parties can privately agree to limit consumption and enforce rules among themselves to overcome the market failure of the tragedy of the commons. Consumers and producers can band together to form co-ops to provide services that might otherwise be underprovided in a pure market, such as a utility co-op for electric service to rural homes or a co-operatively held refrigerated storage facility for a group of dairy farmers to chill their milk at an efficient scale.