Visit the OECD’s ‘Glossary of Statistical Terms’ at the following web...

Question

Visit the OECD’s ‘Glossary of Statistical Terms’ at the following web address:

http://stats.oecd.org/glossary/detail.asp?ID=3254

When the market fails there are calls for the government to step in and clean up the mess. Here, we consider three market failures:

externalities,
public goods, and
informational problems.

Examine each market failure and the effect of each failure considering perfect competition as a benchmark.

There are alternative methods for dealing with market failures that include direct regulation, incentive programs such as tax incentive programs and market incentive programs, and voluntary reductions. At issue, is whether government can successfully address market failures.

Write a brief report (500 words) addressing the following:

Are there sources of market failure other than those listed in your readings?
Describe how government intervention to address a market failure might worsen the situation.
Provide an example of where government intervention does work and why that is so.

Submit this assignment to your instructor using the Assignment Dropbox labeled "LP9:Market Failure."

David · Accepted Answer

Externality is a situation when behavior of one agent affects the other agent for which he neither 
pays nor receives any payment. In other words, it is the situation in which there is divergence 
between social cost (or social benefit) and private cost (or private benefit). There can be of two 
types of externalities; negative externality and positive externality. We consider the case of 
positive externality. 
Positive externality arises when the actions of one individual positively affect/create benefit for 
the other individual for which the first individual does not receive any compensation from the 
second individual. In other words, when there is a divergence between social benefit and private 
benefit of an activity, we have positive externality. 
In this case, Social benefit = private benefit + externality i.e. in case of positive externality, 
social benefit exceeds private benefit. 
For example: Suppose there is farm where trees are grown for some reason such as greenery, 
wood, to sell etc. Planting a tree improves the environment: trees transform greenhouse gases 
into oxygen, improve water retention in the soil, and improves soil quality etc. This implies that 
social benefit associated with planting is higher than private benefit. But the producer who is 
growing the plant may not be interested in all these benefit and he will be concerned about his 
own benefit and profit and therefore will equate private MC with private MB. Because of that the 
output level chosen will be less than socially optimal output. As represented in the figure below 
[Data2], social benefit is higher than the private benefit and hence the output i.e. no of trees 
chosen (Q1) by the producer (by equating private MC with private MB) is less than the socially 
optimal output (Q2).

Visit the OECD’s ‘Glossary of Statistical Terms’ at the following web address: http://stats.oecd.org/glossary/detail.asp?ID=3254 When the market fails there are calls for the government to step in and...

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