failure is known as the inefficient allocation of goods and services in which
there is an outcome in which one may profit but another one may incur loss.
Several problems are created in attaining the Pareto optimality and
maximisation of social welfare. The significant types of this market failure
are public goods, monopoly power and negative externalities.
In this essay I will demonstrate how negative externalities are a form of
market failure. Negative externalities can be defined as the cost of suffering
by a third party as a result of action taken by a producer and a consumer which
is the first and the second party.
Some examples of negative are consumption of demerit goods like tobacco and
drugs, Pollution resulting from a thermal power plant, excessive use of
pesticides and etc.
A thermal power plant
fired by coal produces lots of electricity to power entire cities but comes at
a cost of massive amounts of air pollution affecting the people living near the
plant adversely as they breathe air which is full of harmful green-house
gasses. The Pareto level of efficiency is not attained.
some nations like Sweden, Norway and Denmark which have put a lot of effort in making
lives of the people better but there is still a lot more to do for most other
nations. The welfare loss created by these plants is massive and its solution
can be compensating the people living around it. Government’s intervention could
of great assistance as well. Piguvian Tax can be imposed in more polluting
industries and incentives like subsidies to be given to more eco-friendly
industries. The government should impose tax in a way which allows producers to
attain a social marginal cost. This could reduce the output till the desired
level. The government can regulate to produce goods only till
optimum level by setting up quota. The government can also ask polluting industries to
compensate the people if they are being harmed by the industries in any way.
Carbon tax can be imposed on these industries and price ceiling and price
flooring taken up. People living in nearby locations should be compensated to
move somewhere where there is a better quality of air and life.
Usage of pesticides is
another example of negative externalities. Chlordecone is a pesticide which was
used in the Caribbean islands of Martinique and Guadeloupe France to kill the
BANANA WEEVIL. It was legal at that time and it was used to increase profits
and reducing costs for the plantation owners. Even though the chemical
benefited the farmers, it washed off the land into rivers that flowed into the
coasts where it damaged the freshwater prawn farms in the mangrove swamps which
were rich with lobsters and fisheries. The Fishermen’s lives were affected
adversely all those who ate the fishes fell ill.
The usage of other
methods to kill BANANA WEEVIL was more expensive for the plantation owners than Chlordecone and
the profitability for the farmers was in using the pesticide even though at the
cost of other fishermen. The pesticide was proven to be harmful and thus banned
by various countries including France after a few years. If people were not
able to bargain among each other and come to a settlement, the government could
step in and limit the usage of Chlordecone pollution by reducing the amount of
pesticide used. The production of banana was not the problem for the fishermen.
The problem was the pesticide and so the government could have imposed tax on
the pesticide in way it is used less. The government could have also asked the
farmers to compensate for the losses of the fishermen whose lives were
Hydroelectric Dams is another example of negative externality. The cost
hydroelectric dams pose on the environment is tremendous. Local animals and habitats
are destroyed. Dams have also resulted in flooding at many areas. Millions of
people have been displaced across the world due to the construction of dams.
The Plant life that is submerged in water ultimately results in the production
greenhouse gasses like methane. But despite of all these negative effects of
Hydro-electric dams, they provide us with continuous electricity which is
essential for our day to day lives.
The government can opt
for other methods for producing electricity. The government should also compensate
the people who would be displaced by the construction of the dam by providing
the people who are displaced sources of income and housing at a different
location. The loss of social welfare should be compensated by the government.
So the people are not negatively affected.
Another example is the
usage of antibiotics which has resulted to an external effect that is negative.
Since its discovery in 1928, Antibiotics have saved millions of lives. Fatal
diseases are now treated easily. They are also very cheap to produce due to
mass production. However, the excess and improper use of antibiotics has led to
a post antibiotic era in which the bacteria are becoming resistant to current
antibiotics due to which we will lose much more than we are presently saving
and the implications will be devastating. This is an example of social dilemma
in which something done by an individual in order to obtain his or her own
objectives results into something harmful for someone else.
This is where the
government can intervene by limiting the unnecessary use of antibiotics. In
countries like India where the antibiotics are available easily, regulations
should be made for that. Awareness should be spread about the future risks
involved with the improper consumption of antibiotics which would lead to loss
in social welfare of the people.
Another example of
negative externalities is the urbanisation of rural areas in which new cities
are developed. In the process of urbanisation, rural areas are converted into
urban areas by building more infrastructures like buildings, parks,
recreational places and etc. This truly revolutionises the rural area and
develops it positively. However it leads to a significant negative externality
and leads to welfare loss in which Pareto Efficiency is not met. That is it
leads to speculations in the market and increases the prices of those areas. It
can make it difficult for the some people to afford it and the ones living in
those areas are at times moved outside the city either due to the prices or
they are moved by the government or the developers in order to build the
infrastructure. There have been even times when agricultural lands are used to
develop that kind of infrastructure which leads to loss in production for
agriculture. In addition to that, there are many cases of ghost cities in which
cities are built incompletely due to many reasons like lack of funds of the
developers and etc. In China, there are many ghost cities today in which
billions of dollars were invested. It can be said that the money invested in
the cities is now wasted and if the same money was used for something else, it
would have done something better. The people moved away from their own land and
often not given proper compensations. The government can intervene by imposing
laws and regulations for urbanisations. Completely banning construction on
agricultural land so that it does not hamper the production of agricultural
produce could help. Making sure that if the cities are being made, they are not
being used only for the motive of speculation and making money but also for the
social welfare in which the people who once lived there could benefit from the
urbanisation rather than destruction of their lives.
Through these examples
we can observe that welfare loss has been created for the society and the
government has the authority and potential to minimise the social welfare loss.
The Pareto efficiency has not been attained in these examples and government
intervention could prove to be useful. It can be said when markets are not
working efficiently, government involvement could change the tide by imposing
Piguvian Tax, providing subsidies if something beneficial is done, spreading
social awareness, educating people and teaching moral and social values.