Question

Market Efficiency and Market Failure

The lesson notes describe both positive and negative externalities. An interesting situation occurs when there is a positive externality. This is interesting because economists state this is a result of market inefficiency or failure. Combine the lesson notes with some of your own research and your own experiences to describe when you were part of a transaction that resulted in a positive externality and why the transaction would be considered inefficient. To answer this question, a) describe the transaction, b) describe the positive externality, and c) state why, from an economist’s viewpoint, this would be considered market inefficiency.

Answer 1

Introduction :

Externalities comes from consumption of any good or service attaining to which has has benefitted or cost the third party ,which can lead to market inefficiency as often the price do not equate with the costs taken in or the benefits derived from it

a) It is the LEARNING PROCESS or the education that I get via attending classes making not only me ,other students also learn different aspects of life , from the normal living in society to be self dependent and earn for oneself

b) Education itself is POSITIVE EXTERNALITY ,as not one me and teacher is involved in the process , but the students who are being educated today will become better citizens of tomorrow as they would pay taxes, would be aware of criminal offences thereafter will not engage in them making crime less, these all can only be done if one is properly educated that is only possible through EDUCATION.But these are not accounted for ,during the course of benefits taken from education

c) Economist can consider it as market inefficiency or failure cause - As said above ,unkown to the benefits , some may take it seriously while others not , resulting that education will be UNDER CONSUMED as it's equibirium level will not equate to it benefits . Thereafter , policymakers should try to subsidize the market of positive EXTERNALITY

Conclusion :

It's not just positive ,negative externalities can also lead to market failure or INEFFICIENCY. And policymakers for positive will subsidize market of positive externalities but for negative should punish the causing elements of negative externalities