Question

. A columnist for the Wall Street Journal observes: “No one collects money from those who benefit from the food control a wetland provides, or the nutrient recycling a forest does… In a nutshell, market failures help drive habitat loss.” What does the columnist mean by market failures? What does she mean by habitat loss? Explain why she believes one is causing the other. Illustrate your argument with a graph showing the market for land to be used for development.

Answer 1

What does the columnist mean by market failures?

Market failure is described as a situation where price mechanism or free market allocation leads to inefficient allocation of resources and a deadweight loss of economic welfare .

What does she mean by habitat loss?

Habitat loss is the process by which natural habitat is rendered incapable of supporting its native species or the species it originally sustained . These species are destroyed or displaced causing loss of biodiversity . Here people who benefit from wetlands or forests enjoy positive externality which is not internalized since they enjoy it for free . This gives rise to over exploitation of such natural resources causing loss of habitat .

Explain why she believes one is causing the other. Illustrate your argument with a graph showing the market for land to be used for development.

Market failures occurs due to inefficient allocation . Here over exploitation of free natural resources causes such a market failure . There is a negative externality associated with over consumption of natural resources since they are free . The economic transactions or consumption has a negative effect on the 3rd party which is habitat or biodiversity here . This is can shown by the following diagram :

The Marginal private benefit is higher than marginal social benefit from over consumption of land causing a loss of welfare .