Question

Required: 1500 words

Explain how externalities may lead to market failure. Using suitable example from any country, explain the ways in which the government has intervened to improve the market outcomes.

Answer 1

now firstly understand what externalities stand for, so certain type of activities in which the true cost of a product or services may not reflect in equilibrium. means there is a difference between private cost and social cost. the private cost is a cost which is for the customers who consume that product or services and social cost is a cost which rest of society need to bear it along with individual customers. because of these type of difference in the cost create turbulence in the market and which lead to market failure.

now some externalities are positive and some are negative which affect the market and lead the market to failure because of different reason. take an example of "INDIA". now if we look closing on the Indian market, they are growing very fast and lots of changes are going on in a small span of time.

air pollution is the major negavtive externalities which because it not only effect the country directly but its impact on the market is in an indirect way. many companies need to change their cost structure becasue of that and they avoid to do business becasue of that in that region. here the market is effected by the third part that i air pollution. now governmnet try to impose certain laws over people for exposing more pollution to air like banned of crackers in the prime time of day on festivals, educating farmer about crop burn effect. these may help the market too as more and more law impose and new product as a substitue can be generated.

postive externalities "like education" as in india the population is very vast but the educated population is some what less. so this also impact companies to stablish new product and services as, they coudn't communicate well with local hence market FDI is less and which can lead to market failure. but we called it positive because the scope of prevention of failure is more. hence if the government provide more facilitests to people then maket failure can be prveneted. the indian government is show lot of interest in this sector of education. lots of scheme is lauched in the different region if india to provide education for free to all the citizen of india.

these type of government initiative, help the market to grow and lead the country to the more profitable hub.