While most governments' eyes are on the banking crisis, a much bigger issue - the environmental crisis - is passing them by, says Andrew Simms. In the Green Room this week, he argues that failure to organise a bailout for ecological debt will have dire consequences for humanity.

"Nature Doesn't Do Bailouts!" said the banner strung across Bishopsgate in the City of London.

Civilisation's biggest problem was outlined in five words over the entrance to the small, parallel reality of the peaceful climate camp. Their tents bloomed on the morning of 1 April faster than daisies in spring, and faster than the police could stop them.

Here we are, faced with the loss of an environment conducive to human civilisation, and we find governments prostrate before barely repentant banks, with their backs to a far worse ecological crisis Eyewitness: Two days of protests

Across the city, where the world's most powerful people met simultaneously at the G20 summit, the same problem was almost completely ignored, meriting only a single, afterthought mention in a long communique.

World leaders dropped everything to tackle the financial debt crisis that spilled from collapsing banks.

Gripped by a panic so complete, there was no policy dogma too deeply engrained to be dug out and instantly discarded. We went from triumphant, finance-driven free market capitalism, to bank nationalisation and moving the decimal point on industry bailouts quicker than you can say sub-prime mortgage.

But the ecological debt crisis, which threatens much more than pension funds and car manufacturers, is left to languish.

It is like having a Commission on Household Renovation agonise over which expensive designer wallpaper to use for papering over plaster cracks whilst ignoring the fact that the walls themselves are collapsing on subsiding foundations.

Beyond our means

Each year, humanity's ecological overdraft gets larger, and the day that the world as a whole goes into ecological debt - consuming more resources and producing more waste than the biosphere can provide and absorb - moves ever earlier in the year.

The same picture emerges for individual countries like the UK - which now starts living beyond its own environmental means in mid-April.

Bad market design, feeble carbon reduction targets and the recession have all conspired to drive down the cost of carbon emission permits

Because the global economy is still overwhelmingly fossil-fuel dependent, the accumulation of greenhouse gases and the prognosis for global warming remain our best indicators of "overshoot".

World famous French free-climber Alain Robert, known as Spiderman, climbed the Lloyds of London building for the OneHundredMonths.org campaign as the G20 met, to demonstrate how time is slipping away.

Using thresholds for risk identified by the Intergovernmental Panel on Climate Change (IPCC), on current trends, in only 92 months - less than eight years - we will move into a new, more perilous phase of warming.

It will then no longer be "likely" that we can prevent some aspects of runaway climate change. We will begin to lose the climatic conditions which, as Nasa scientist James Hansen points out, were those under which civilisation developed.

Small dividend

As "nature doesn't do bailouts", how have our politicians fared who ripped open the nation's wallet to save the banks?

Not good.

According to the International Monetary Fund (IMF), the UK spent a staggering 20% of its GDP in support of the financial sector.

Yet the amount of money that was new and additional, announced in the "green stimulus" package of the Treasury's Pre-Budget Report, added-up to a vanishingly small 0.0083% of GDP.

Globally, the green shade of economic stimulus measures has varied enormously. For example, the shares of spending considered in research by the bank HSBC to be environmental were:

• the US - 12%
• Germany - 13%
• South Korea - 80%

The international average was around 15%. HSBC found the UK planned to invest less than 7% of its stimulus package (different from the bank bailout) in green measures.

Comparing the IMF and HSBC figures actually reveals an inverse relationship - proportionately, those who spent more on support for finance had weaker green spending.

So here we are, faced with the loss of an environment conducive to human civilisation, and we find governments prostrate before barely repentant banks, with their backs to a far worse ecological crisis.

Extreme markets

On top of low and inconsistent funding for renewable energy, the shift to a low carbon economy is being further frustrated by another market failure in the trade for carbon seen, for example, in the EU's Emissions Trading Scheme.

"Spiderman" scaled the Lloyds Building in support of the climate campaign

Bad market design, feeble carbon reduction targets and the recession have all conspired to drive down the cost of carbon emission permits, wrecking economic incentives to grow renewable energy.

Worse still, the difficulty of accounting to ensure that permits represent real emissions has led both energy companies and environmentalists to warn of an emerging "sub-prime carbon market".

Relying on market mechanisms is attractive to governments because it means they have less to do themselves. But they will fail if carbon markets are just hot air.

There seems to be a hard-wired link between memory failure and market failure.

As the historian E J Hobsbawm observed in The Age of Extremes: "Those of us who lived through the years of the Great Slump still find it almost impossible to understand how the orthodoxies of the pure free market, then so obviously discredited, once again came to preside over a global period of depression in the late 1980s and 1990s".

Perhaps the greatest failure is one of imagination.

Some people alive today lived through those past recessions and depressions. They know they can be nasty and need averting.

But the last time the Earth's climate really flipped was at the end of the last Ice Age, more than 10,000 years ago. No one can remember what that felt like.

Lessons of history

Looking forward, the IPCC's worst case scenario warns of a maximum 6C rise over the next century.

Looking back, however, indicates that an unstable climate system holds worse horrors.

Work by the scientist Richard Alley on abrupt climate change indicates the planet has previously experienced a 10C temperature shift in only a decade, and possibly "as quickly as in a single year".

And, around the turn of the last Ice Age, there were "local warmings as large as 16C".

Imagine that every day of your life you have taken a walk in the woods and the worse thing to happen was an acorn or twig falling on your head.

Then, one day, you stroll out, look up and there is a threat approaching so large, unexpected and outside your experience that can't quite believe it, like a massive gothic cathedral falling from the sky.

In tackling climate change we need urgently to recalibrate our responses, just as governments had to when they rescued the reckless finance sector.

Then officials had to ask themselves "is what we are doing right, and is it enough?"

They must ask themselves the same questions on the ecological debt crisis and climate change.

The difference is, that if they fail this time, not even a long-term business cycle will come to our rescue. If the climate shifts to a hotter state not convivial to human society, it could be tens of thousands of years, or never, before it shifts back.

Remember; nature doesn't do bailouts.

Taken from:

http://news.bbc.co.uk/2/hi/science/nature/7988648.stm

Comments:

I think this is a good example of market failure as resources such as professionals are immediately allocated to resolve the current economic crisis when there is a bigger impending global crisis since many years back: global warming.

I feel that the UK government is undermining the effects of this economic problem as they only intend to invest less than 7% of its stimulus package in green measures compared to the amount it is investing in support of the financial sector, which is about 20% of its GDP. The international average of spending on environmental issues is on the average, 15%.

Furthermore, the government is relying too much on the market mechanism, as the adjustment of the market is natural due to demand and supply factors and requires little of their intervention. However, environmental problems, if left to the market, will worsen as producers will ignore any quota and continue to harm the environment to increase their revenues, that the marginal social cost is higher than their marginal private cost, which causes the environment to lose out more.

Hence i feel that the governments should do more to tackle the environmental issues, to resolve the market failure by allocating enough resources and attention to the causes of global warming.

- GERALDCE yeah

The problem of overtaxing and undertaxing

Taxes are compulsory payments made to the government by firms and individuals, and they are implemented to reduce production and consumption levels to the socially efficient level, where MSB=MSC.

Governments should impose a tax that is equal to the marginal external cost (MEC). However, it is difficult to measure the exact MEC and therefore, it is hard for the government to impose the correct amount of tax. This will lead to the problem of overtaxing or undertaxing. Both overtaxing and undertaxing leads to market failure as resources are still not allocated efficiently.

Undertaxing brings the economy closer to the optimal level. However, overtaxing discourages producers from producing and this leads to quantity supplied being lower than expected. This may even lead to multinational companies withdrawing their investments and investing in other countries with lower taxes. This is an undesirable outcome as a new inefficiency is created.

Thus, overtaxing is more problematic.

Yu Ning(:

Mini mindmap!

this is a mindmap on the examples of externalities

examples of externalities

What are Externalities?

An externality is a cost or benefit that affects someone not directly involved in the production or consumption of a good, and which occurs without compensation. Externalities are in effect a type of market failure. When an externality exists, either too much or too little is either produced or consumed than the market price dictates.

There are Positive and Negative externalities, external cost or benefit, and as a subsection of each there are producer and consumer externalities. Here is an example of each:

Positive Producer Externality/ external benefit in production
Education creates a positive externality because more educated people are less likely to engage in violent crime, which makes everyone in the community, even people who are not well educated, better off.

Positive Consumer Externality/ external benefit in consumption
An individual planting an attractive garden in front of his house may provide benefits to others living in the area, and even financial benefits in the form of increased property values for all property owners.

Negative Producer Externality/ external cost in production
The harvesting by one fishing company in the ocean depletes the stock of available fish for the other companies and overfishing may be the result. This is an example of a common property resource, sometimes referred to as the Tragedy of the commons.

Negative Consumer Externality/ external cost in consumption
An example would be when someone throws away the wrapping to a present. The wrapping is then eaten by a farm animal and the animal dies

imba
leemin!

Factor leading to market failure: Inefficiency

Market failure occurs when the price mechanism has failed to achieve efficiency in resource allocation and equity in income and wealth distribution.

Economic efficiency is only achieved when it is not possible to change the existing allocation of resources in a way that makes one person better off without making someone else worse off.
This can only be achieved when productive efficiency and allocative efficiency is met.

Looking into allocative efficiency, we must ensure that every sector in the market produces an output whereby MSB = MSC. Only at this output level, will then the sum of consumer and producer be maximized, leading to yet another maximization of soceity's welfare.

Under perfect competition and no externalities, there would be no divergence between private and social costs and benefits---------> MPB=MSB, MPC=MSC.
The result is that the market equilibrium output coincides with the socially optimum output and hence the resources in the market would be used efficiently.

However, if MSC was to exceed MSB, it would lead to a welfare loss and hence a situation of allocative inefficiency where the soceity's welfare is not maximized.

In conclusion, it is vital for the government to ensure that the society's welfare is maximized in order for the market to progress. He should focus on the inefficieny in resource allocation if there is any to correct market failure.

Debra Peh

Is overtaxing or undertaxing more problematic?

Taxes are compulsory payments made to the government by individuals and firms. Both overtaxing and undertaxing lead to the inefficient allocation of resources, resulting in market failure.

While undertaxing brings the economy closer to the optimal level, overtaxing may discourage producers from producing and output produced will be lower than the optimal level. In some circumstances, foreign producers may even decide to locate elsewhere to avoid paying such high taxes. In the latter, society's welfare is even lower than before tax. Thus, overtaxing is definitely more problematic as compared to undertaxing.

On the other hand, most cities are building new slums faster than they can save from destruction and renew their old slums. Urban decay and blight are diffusing into new areas faster than all the huge sums of money spent on urban redevelopment and public housing can relieve existing slums. This would definitely happen as long as our urban tax system subsidises slums by undertaxing and deter improvements by overtaxing.

Moreover, overtaxing may add on to the burdens of the lives of the people and firms. Thus, this may make the lives of the people more difficult and firms may close down due to the high taxation.

Thus, it is no doubt that overtaxing is more problematic than undertaxing.

~Wan Ying (13) ;D

please refer to the comments given by Ms chen at the end of every post(if any).
Most of the older posts already have comments so check it out!


-Fabian

Overtaxing is more problematic.

Overtaxing is more problematic.

Taxes are complulsory payments to be made to the government by firms and individuals.

In the case of external cost in production, taxing is one of the solutions to reduce production & consumptions levels. This is to achieve social efficiency, where MSB(marginal social benefit)=MSC(marginal social cost).

As it is difficult to measure the exact external cost in production, overtaxing or undertaxing may occur. Undertaxing will, more probably, allow social efficiency to be attained. The optimal level will be reached. However, if overtaxing occurs, producers will be discouraged instead. Either they will produce less, or more firms will back out from the market.

Also, foreign producers may choose to re-allocate(in other countries) if they feel the taxes imposed are too high. This leads to the welfare of the society to be lower than it was before the tax was imposed.

Therefore, overtaxing is definitely more problematic than undertaxing.


-Felicia (Yan Xin)

How to Overcome Market Failure?

Market failure occurs when the price mechanism is unable to allocate resources efficiently and equitably. This is where the government needs to intervene and come up with solutions to enable the allocation of scarce resources.

Now then, how can market failure be overcome?

(With reference to this Video: http://www.youtube.com/watch?v=Unh9uJggjRg)

In the event of external cost of production, the government should intervene and carry out various plans, such as implementing taxes or providing subsidies. This is to correct externalities to obtain social efficiency, where Marginal Social Benefits=Marginal Social Costs (MSB=MSC).

Taxes are payments that producers and consumers are required to make to the government.

In the event of external benefit in production and/or external benefit in consumption, subsidies should be granted by the government to producers. This is in a bid to increase supply(in the case of external benefit in production) and to increase demand(in the case of external benefit in consumption).


-Felicia(Yan Xin)

Case study: Primary healthcare in S'pore

Some background information

• A recent study by Wong CY et al revealed that, which quantified the perception that as compared to last decade, GPs are operating under more trying conditions.
  
• Costs have increased: rentals by 31.4%, drugs by 41.7%, utilities/ laboratory by 58.8%. However consultation fees have only increased by 25.4%, and the GP's income has largely stagnated over the past 10 years (mean monthly income 2006: $10,524, 2007: $10,271).

How will this trend lead to market failure in Singapore?

• Figure 1 above shows how low quality standards and especially low pricing, led to a lower combined supply curve.
  
• The actual demand for good GP care by patients has also declined.
  
• An uninformed patient faces a combined supply of good (well trained) and less well trained GPs, and knows he has a chance of drawing an "adverse selection", because he may have little knowledge on how to differentiate between the two - there is asymmetry of information.
  
• He thus lowers his demand curve, and is not willing to pay a premium, even if he sees a doctor with "GDFM" or "MMed" tagged to his name.
  
• Lower price (consult fees) drives out better quality.
  
• Less doctors are willing to supply service at this price. Junior doctors are not keen to take up further FM training, and trained ones are not keen to join the market.
  
• Consumers will then face the GP market with even worse adverse selection.
  
• As the demand curve adjusts lower and lower (the red line in Figure 1 above), and the combined supply curve shifts further from that of good GP care, there will come a point in time when supply of bad quality exceeds demand, and only the bad ones are left in market. This is market failure of healthcare.

Solution?

• The Family Physician Register introduces an Appraisal Mechanism to objectively resolve the asymmetry of information and differentiate the well trained GPs from the rest.
  
• Doctors who chose to take up the 2-3 year of FM training would be able to signal to the patients that they were serious about upgrading of skills in order to offer better treatment.
  
• The need to invoke the support of the so-called 4Ps - people, press, policy makers and profession is recognized. The public and our patients need to be convinced that they are well trained and capable to take on mainstream Family Medicine, chronic disease management, right-siting, integrated care.

In conclusion, when more consumers are aware of the value and willing to pay the due worth of good care, then the demand-supply curves will meet at a different point, preventing market failure.

P.S:Other information not mentioned such as full background information can be found here. Source is taken from same place as well.

-yuncheng

The market for lemons

"The market for lemons: quality uncertainty and the market mechanism" is a 1970 paper published by George Akerlof, an economist.

Akerlof's lemons state that...

• When consumers do not get the right information or lack the relevant information on the benefits or harm that they are likely to receive from the consumption of the good (see information failure from the previous post), producers will lower product quality.
• Consumers will expect producers to improve on the quality of product by lowering their willingness to pay
• Prices will then decline
• Producers have no choice but to lower quality even further to make profits at even lower prices
• Ultimately, quality will decline till what that's left are the lemons of lowest quality.
• Producers can't sell high quality goods at high prices even though buyers would be willing and able to pay for the high quality goods.
• So, market fails! Yay!

Now, we shall take a look at second hand cars. As mentioned by the econs lecturer if you're not dozing away like yaowen during lecture, second hand cars can be classified into 2 categories, mainly the lemons and the plums. Lemons represent bad cars, and plums the opposite. Imagine that in a market....

1. There are 10 lemons and 10 plums.
2. Consumer are willing to sell $1 for lemons, $2 for plums.
3. Producers are willing to pay $2 for lemons, $4 for plums.
4. If there's no information failure, ideal equilibrium price for lemons would be between $1 ~ $2 while for plums, it would be between $2 ~ $4.
5. However, here comes the problem. There is no assurance of quality and hence consumers will be kept in the dark about the quality.
6. If the consumer were to assume that there is a 50% chance of getting either a plum or lemon, then the he/she would be willing to pay (0.5)(2)+(0.5)(4) = $3. This price is less than the price expected from selling plums, thus only lemons would be offered for sale.
7. However, if a consumer is certain that he is getting a plum, he would be willing to pay anywhere between $2~$4.
   
8. Even though the price is within the producers' price expectation of plums, no such transaction will take place.
9. The consumer can only find out whether he/she has purchased a lemon or a plum after purchasing the object.

Also, this means that an owner of a car which is still in good condition will be unable to fetch a high enough price to make selling that car worthwhile. Thus, owners of good cars will not sell them to the second hand car market. This can be otherwise summarized as "the bad drive out the good" in the market.

In conclusion, moral hazard is the lack of incentive to take care. It works under the assumption that if you have an insurance, then the percentage chance of being cheated is lower. Less insurance leads to more risk, and more insurance leads to less care.

-yuncheng

Introduction to information failure

Market failure occurs whenever the price mecahnism fails to allocate resources effientiently and euitably an usually, the government needs to take action and provide non-market mechanism to allocate scarce resource.

Another way in which markets can fail due to ineffiency in the allocation of resources, besides externalities, would be information failure.

Informatin failure occurs when consumers do not get the right informatin or lack the relevant information on the benefits or harm that they are likely to receive from the consumption of the good. Information failure may also be a situation whereby one party in the market has more information than the other, leading to asymetric information. this would then cause an inappropriate amount of the products to be consumed and produced, leading to ineffiency.


Information failure can exists in everyday life:


Merit goods:

• education, vaccination, vitamins, healty diets, exercise etc....people might not be aware of the true benefits of such activities and might be consuming too little of such goods

Demerit goods:

• people who smoke, drink, gamble, steal, rob, consume drugs etc.........people might not be aware about the true harm of such vices and might consume too much

Asymmetics information(when one side has more info then the other)

• Insurance: the consumer knows more about his own ailments can compared to the insurance agent. people with more illnesses are then more likely to buy insurance



• 2nd hand car market: sellers know more about the quality of the car as compared to the buyer. the buyer might be deceived into buying cars that are of low quality
  
  
• slimming centres: side effects of the programms are not made known to the consumerer

Kimbo:)

Kimberley:)

OVER-subsidizing or UNDER-subsidizing

In the case of market-based solutions for external benefit in productions, which one is more problematic? OVER-subsidizing or UNDER-subsidizing?

A subsidy is a financial assistance given by the government to encourage production. It is difficult to impose the correct amount of subsidy as the measuring of the exact value of external benefit is a very difficult task.

In the case of over-subsidising, large amount of taxes may be required. This causes disincentive effects on work and investment as people do not feel the need to work hard since the “extra” money that they earn will go to paying for the taxes. This will cause adverse effects on economic growth.

However, in the case of under-subsidising, producers may not want to produce the goods as they do not find themselves benefiting much from the subsidies. Therefore this defeats the purpose of the government implementing subsidies in the first place. However, the government can actually increase the subsidies if the producers are not responsive to the subsidies, this will encourage producers who lack the capital at first to enter the market with the increase in subsidies.

In the case of market based solutions for external benefit in productions, over-subsidising is more problematic compared to under-subsidising as over-subsidising will cause negative effects on other industries which are affected by the overwhelming taxes. On the other hand, under-subsidising will only affect the industry itself, and perhaps those that are related to it. The negative effects of under-subsidising are not as problematic as those due to over-subsidising.

- Vivian

Various type of externalities

Externalities occur when the consumption or production of a good impacts on people other than the producers or consumers that are participating in the market for that good. They are the side effects bourne by third parties. In each case the firms or the individuals will bear some form of cost known as the external cost. There are a number of types of externalities.
-Producer on producer externalities e.g. a copper smelting firm contributing to acid rain which affects the crops of surrounding farmers
-Producer on consumer externalities e.g. a copper smelting firm causing air pollution that causes tuberculosis
-Consumer on consumer externalities e.g. smokers causing smoking relating ailments in non- smokers
-Consumers on producer externalities e.g. passenger cars causing congestion and slowing business traffic
In addition to negative externalities, there are positive externalities i.e. benefits accruing to non-participants in the market place arising from the consumption and production of goods and services. These are the external benefits.
When externalities result in third parties having to use resources in response to the external costs and benefits, it would lead to a misallocation of resources, eventually resulting in market failure.

- Fangyi.

Economics department

OVER-subsidizing or UNDER-subsidizing(With good evaluation)

Is OVERSUBSIDIZING or UNDERSUBSIDIZING more problematic?

I feel that undersubsidizing is more problematic as if firms are undersubsizied, they will not have enough capital to start their own enterprise. Hence, this will lead to less suppliers in the market and with lesser output, less revenues will be collected, and in the long run, the country's economy might be stagnant and not be able to compete against other upcoming countries like Vietnam. Also the country's standard of living might be affected and result in more unsatisfaction in the people. Hence, undersubdizing firms can lead to 2 major problems: economical and social.

Oversubsidizing on the other hand, may allow firms to start their enterprise with lesser usage of capital, and hence with the extra capital on hand, they can easily expand their businesses and tap on overseas markets, earning foreign as well as local capital. With more enterprises and higher output, a country will be able to earn higher revenue, leading to higher standard of living. Services will thus be top-notch as well to compete against rival countries, hence attracting foreigners' money, increasing revenue for the country as well. Even though higher taxes will have to be paid by citizens, most of them will not mind as given the economic status of the country, they will more likely earn back their money through bonuses and other payouts.

Therefore, undersubsizing is more problematic.

-GERALD :D:D:D:D:D

Definition of market failure and govt intervention.

A market failure exists when the production or use of goods and services by the market is not efficient.

GOVERNMENT INTERVENTION
Government intervene to correct for the problems created by market failure and to improve efficiency

-Pollution taxes
-Policies to introduce competition into markets
-Price controls

ETHEL :)

Question #1

In the case of market-based solutions for external benefit in productions, which one is more problematic? OVER-subsidizing or UNDER-subsidizing?

:D Everybody is allowed to attempt this question!

Market failure.

Inefficiency in the allocation of resources and inequity are the main causes of market failure. Market failure is the situation where, in a given market, the quantity of a product demanded by consumers is not equal to the quantity supplied by producers and occurs whenever the price mechanism fails to allocate resources efficiently and equitably and usually the government needs to take actions and provide a non-market mechanism to allocate scarce resources. Also, inefficiency in allocation of resources basically means the inability to achieve allocative efficiency and productive efficiency. Allocative efficiency means the economy is producing the right amount of the right goods while productive efficiency means producing a maximum output with a minimum quantity of resources or if a given output is produced at the lowest possible total cost. On the other hand, inequity refers to the unequal, unfair distribution of income and wealth, and both factors give rise to market failure.

Firstly, a feature of the efficient market is that the total surplus is maximised, in other words, the social benefits are as large as possible. In addition, the allocative efficiency is when the price in the market is equal to the marginal cost of production, thus the sum of consumer and producer surplus in each market is maximised. Under conditions of perfect competition and no externalities, the supply curve in a competitive market depicts the marginal cost of production. However, this is generally not true in other types of markets where the price is usually above the marginal cost, thus contributing to inefficiency in the allocation of resources, and hence market failure as the total surplus is not maximised.

Next, competitive markets often give rise to the efficient allocation of resources. However, problems which contribute to inefficiency in the allocation of resources or market failure may appear. This welfare loss to the society is known as deadweight loss. For example, a sales tax drives a wedge between the consumer price and the producer price and decreasing the equilibrium quantity sold, resulting in deadweight loss.

Furthermore, externalities are also a main cause of market failure. Externalities are cost or benefit that affects someone not directly involved in the production or consumption of a good, and which occurs without compensation, often referred to as the third party effects. There are basically two types of externalities – the external cost and external benefit. The external cost refers to the cost of production or consumption borne by people other than the producers or consumers, such as education; while the external benefit refers to the benefit from production or consumption experienced by people other than producers or consumers. In the latter, the private market is manufacturing very few of the goods, and subsidies should be put in place in order to boost the socially highest level of output.

Lastly, the market may experience inefficiency in the allocation of resources or fail to allocate wealth in a just and unbiased way, leading to inequity. Inequity refers to an allocation of resources that is considered to be unfair and unjust. Many a times, the most efficient result does not seem especially fair, and the fairest result is not especially efficient. For example, people do not have the same opportunity to accumulate wealth. They can become wealthy through high income and savings. However, the main reason for people’s wealth is inheritance, thus this shows that there is a very uneven distribution of income and wealth, thus giving rise to market failure due to inequity.

In conclusion, inefficiency in the allocation of resources and inequity are the major factors of market failure as they lead to both the biased allocation of wealth and income and also the presence of externalities which involves a third party to bear the cost of production or consumption.

~Wan Ying (13) ;D

Examples of externalities

1.Externality is defined as the cost and benefit that affects someone who is not directly involved in the production on consumption activities.




2.Smoking cigarettes create external cost in consumption as family members who inhale he smoke suffer from cancer and other illnesses











3.Student who pursur higher education benefits society and this is an example of external benefit in consumption.








4.A firm that innovate and benefit other firms from the innovation is creating external benefit in production









5.Consumption externalities creates a divergence in the benefit curve.


-Fabian

Market Failure

Market has failed when there is inefficiency in allocation of resources or inequity. This blog is set up to discuss such market failures. Please post aggressively and passionately...


-Sagar, Ganesha, Nicholas