Markets Failures And Exceptions For Each Of The Following Si

Markets Failures And Exceptionsfor Each Of The Following Situat

For each of the situations described, identify the type(s) of market failure that has occurred. Explain how the failure arose, and describe potential remedies or solutions. Use graphs or diagrams to justify your explanations.

Paper For Above instruction

Market failures occur when the allocation of goods and services by a free market is inefficient, often justifying intervention. The scenarios presented highlight different types of market failures, including externalities, public goods, and free rider problems. This paper examines each situation, analyzes the causes of failure, and discusses possible remedies, supported by economic theory and graphical representation.

Situation 1: Environmental Externalities in Cement Sifter Production

The first scenario involves Firm A, which produces cement sifters through processes that involve melting metals and chemicals, resulting in waste that contaminates a nearby river. This represents a classic case of a negative externality—where the private costs of production do not reflect the social costs. The firm’s decision to produce is based on private costs, ignoring the external costs imposed on the environment and society. As a result, the market produces more cement sifters than is socially optimal, leading to overproduction and environmental degradation.

Graphical Illustration: A typical supply and demand diagram shows the divergence between private and social costs. The private supply curve (S private) intersects the demand curve at an equilibrium quantity (Q private), which exceeds the socially optimal quantity (Q social), identified where the social cost curve (S social) intersects demand. This deadweight loss signifies market failure due to externalities.

Remedies: The government can internalize externalities via Pigovian taxes, which raise production costs to reflect true social costs, thereby shifting supply to align with social optimum. Alternatively, regulations or emission standards could limit waste discharge, and tradable pollution permits can cap total external damages while allowing market-based compliance.

Situation 2: Education and Public Goods

The second scenario concerns a government policy allowing residents to attend in-state universities tuition-free, which increases the state's overall education level and productivity. Education possesses characteristics of a public good—non-excludable and non-rivalrous—leading to a free rider problem where individuals consume benefits without directly paying for them.

Market Failure Explanation: Private markets under-provide public goods like education because individuals may benefit without paying, creating underinvestment and undersupply. The government intervenes through subsidies or free access, aiming to increase educational attainment.

Graphical Illustration: An ideal diagram shows the social benefit curve lying above the private benefit curve. Without government intervention, the market equilibrium (Q private) underproduces compared to the socially optimal level (Q social), where marginal social benefit equals marginal social cost.

Remedies: Public financing of education, direct subsidies, or providing free access ensures that the socially optimal level of education is achieved, solving the free rider problem.

Situation 3: Public Goods and Free Rider Problem in Subdivision Road Paving

The third case involves a small subdivision where residents share a dirt road, which Bob wishes to pave. When Bob asks residents to share costs, they refuse, illustrating a typical free rider problem characteristic of local public goods. The road benefits all residents and cannot exclude non-payers, leading to under-provision of the good if left solely to private action.

Market Failure Explanation: The road is a public good with non-excludability and non-rivalry, resulting in free riding. Residents' reluctance to pay for paving causes the good to be underprovided, leading to a suboptimal level of infrastructure development.

Graphical Illustration: A supply and demand graph for public goods emphasizes that private market provision halts at a level below the social optimum due to free rider incentives. The government or community authorities need to finance or mandate payments to achieve efficient provision.

Remedies: Compulsory assessments, public funding, or cooperative agreements can ensure the road is paved, overcoming free rider issues and securing efficient resource allocation.

Situation 4: Public Goods in National Defense and Voluntary Contributions

The final scenario reflects a national policy where the government seeks voluntary contributions from citizens for national defense costs. The advisor arguing against voluntary funding highlights the problem of free riding and the non-excludability of national defense—an example of a pure public good.

Market Failure Explanation: National defense is non-excludable and non-rivalrous, meaning individuals cannot be prevented from benefiting once provided, and one person's benefit doesn't diminish another's. Under voluntary contributions, free riding leads to underfunding, inadequate provision of defense, and a market failure.

Graphical Illustration: The supply and demand diagram for public goods shows that voluntary contributions will fall short of the socially optimal level of funding, resulting in a horizontal (public good) supply curve that intersects the demand at a level less than the optimal.

Remedies: The government must fund national defense through taxation to ensure that all citizens contribute fairly, overcoming free rider problems and guaranteeing adequate provision of public goods.

Conclusion

These situations exemplify different types of market failures—externalities, public goods, and free rider problems—that lead to inefficient resource allocation. Effective remedies often involve government intervention through taxes, regulation, or public provision to correct these failures. Recognizing the nature of each failure allows policymakers to design targeted interventions that promote social welfare and optimal resource use.

References

• Baumol, W. J., & Oates, W. E. (1988). The Theory of Environmental Policy. Cambridge University Press.
• Samuelson, P. A. (1954). The Pure Theory of Public Expenditure. Review of Economics and Statistics, 36(4), 387-389.
• Stiglitz, J. E. (1989). Economics of the Public Sector. W. W. Norton & Company.
• Tietenberg, T., & Lewis, L. (2016). Environmental and Natural Resource Economics. Routledge.
• Mankiw, N. G. (2014). Principles of Economics. Cengage Learning.
• Pigou, A. C. (1920). The Economics of Welfare. Macmillan.
• Casella, A. (2009). Paradigms of Public Economics. Harvard University Press.
• Bator, F. M. (1958). The Anatomy of Market Failure. Quarterly Journal of Economics, 72(3), 351-379.
• Cornes, R., & Sandler, T. (1996). The Theory of Externalities, Public Goods, and Club Goods. Cambridge University Press.
• Rubinstein, R., & Oates, W. E. (1993). Elasticities of Demand: Measurement and Implications. Journal of Economic Perspectives, 7(4), 3-24.