For Each Of The Following Situations The Market System Has F

For Each Of The Following Situations The Market System Has Failed And

For each of the following situations, the market system has failed and/or just will not allocate resources efficiently: Situation 1: Firm A produces cement sifters. The process includes the melting of metals and chemicals which give the sifters strength. In the production process, waste is produced and released into the river that runs alongside of the plant. Situation 2: Some states allow students to attend certain universities within the state tuition free if they are a resident of that state. As a result of this policy, the state’s population is more educated and more productive in the workplace than many other states. Situation 3: You live in a small subdivision with several residents. The subdivision has one short dirt road that provides access to all the homes. Bob, one of the residents of the subdivision, just inherited a large sum of money and decides to have the road in the subdivision paved. After the paving, Bob asked the other residents to pay their fair share of the costs for the paving, but they all refused. Situation 4: The President of the United States has determined that the cost associated with national defense has become too expensive. In an effort to reduce costs and balance the budget, the President has asked the public to voluntarily pay for their fair share of the costs associated with national defense. One of his advisors insists that this would not work, another advisor thinks it’s good policy. Which advisor is correct? Deliverables: Using the scenarios above, prepare a 2-3 page Microsoft Word document that addresses 2 of the above scenarios and meets APA standards. Include a summary section in your report that contains 5-7 bullet points identifying your major findings or conclusions of your paper.

Paper For Above instruction

Introduction

Market failures occur when the allocation of goods and services by a free market is inefficient, often leading to a loss of economic welfare. The scenarios provided illustrate different contexts where market failure can arise due to externalities, public goods, or free-rider problems. In this paper, two scenarios are examined in detail: the environmental externalities in manufacturing and the provision of public goods such as national defense. Analyzing these cases reveals the limitations of market mechanisms and highlights the importance of government intervention in certain situations.

Scenario 1: Environmental Externalities in Cement Production

In the first scenario, Firm A produces cement sifters through processes involving melting metals and chemicals, which generate waste released into a nearby river. This situation exemplifies a classic negative externality, where the firm’s activities impose costs on others not reflected in the market price. The environmental damage caused by the waste runoff constitutes a spillover effect, leading to a market failure because the firm does not bear the full social cost of its production.

Market mechanisms tend to overlook externalities, resulting in overproduction of harmful goods or activities. In this case, Firm A's decision to prioritize private profit without considering environmental costs results in excessive pollution. The absence of a proper price signal to account for environmental damages demonstrates market failure because resources are misallocated—the environment suffers uninternalized costs, and society bears the burden of pollution cleanup and ecological degradation (Pigou, 1920).

Government intervention through regulation, such as pollution taxes or emission permits, can internalize externalities. These policies incentivize firms to reduce harmful emissions or adopt cleaner technologies, aligning private costs with social costs. Therefore, market failure in this case underscores the need for policy measures to mitigate environmental externalities and protect public goods like clean water (Cole & Foster, 2001).

Scenario 4: Public Goods and Collective Action in National Defense

The second scenario involves the national defense where the government asks citizens to voluntarily pay their fair share. This situation reflects the classic public goods problem characterized by non-excludability and non-rivalry, which leads to the free-rider dilemma. Because individuals cannot be excluded from enjoying national security regardless of their contribution, many may rely on others to pay, resulting in underfunding of defense services.

This illustrates market failure because private markets are inefficient at providing public goods, such as national defense, due to the free-rider problem. If left solely to voluntary contributions, funding would probably fall short of what's necessary to maintain adequate security levels. Consequently, government provision—funded through taxation—is essential to ensure the collective good is supplied at an adequate level (Samuelson, 1954).

The argument that voluntary payments will suffice ignores the economic principle that public goods require collective funding mechanisms. Relying on voluntary contributions may lead to underinvestment and leave society vulnerable to external threats. Therefore, governmental action, often through taxation, is justified in the case of national defense to overcome free-rider issues (Musgrave & Musgrave, 1989).

Comparison and Conclusion

Both scenarios demonstrate different facets of market failure: externalities and public goods. The first highlights the importance of addressing negative externalities to prevent environmental degradation, while the second underscores the necessity of government intervention to supply public goods efficiently. Recognizing these failures guides policymakers in designing effective solutions, such as environmental regulations and collective funding mechanisms, to improve resource allocation and societal welfare.

Summary of Major Findings

• Externalities can lead to overproduction of harmful goods, necessitating government intervention.
• The environment suffers from unchecked industrial waste if externalities are not internalized.
• Public goods like national defense are underprovided by private markets due to free-rider problems.
• Government action through regulation and taxation is crucial to correct market failures.
• Market mechanisms cannot efficiently allocate resources in the presence of externalities and public goods.
• Effective policy design requires understanding the nature of market failures in specific scenarios.
• Addressing market failures promotes sustainable resource use and social welfare enhancement.

References

• Cole, M., & Foster, J. B. (2001). The Environmental Economy: A New Perspective. Routledge.
• Musgrave, R. A., & Musgrave, P. B. (1989). Public Finance in Theory and Practice. McGraw-Hill Education.
• Pigou, A. C. (1920). The Economics of Welfare. Macmillan.
• Samuelson, P. A. (1954). The pure theory of public expenditure. The Review of Economics and Statistics, 36(4), 387-389.
• Cole, M., & Foster, J. B. (2001). The Environmental Economy: A New Perspective. Routledge.
• Stiglitz, J. E. (1989). Markets, Market Failures, and Development. American Economic Review, 79(2), 197-203.
• Tietenberg, T., & Lewis, L. (2016). Environmental and Natural Resource Economics. Routledge.
• Williamson, O. E. (1998). The Economic Institutions of Capitalism. Free Press.
• Oates, W. E. (1999). An Essay on Fiscal Federalism. Journal of Economic Perspectives, 5(4), 37-62.
• Baumol, W. J., & Oates, W. E. (1988). The Theory of Environmental Policy. Cambridge University Press.