Question

1. Externalities, such as pollution, cause market failure. Explain what is meant by market failure.
2. What are some of the costs of controlling pollution. Is a perfectly clean environment economically desirable?
3. Given all we know about the hazards of pollution, what should we do to get rid of pollution? What are the Conservative, Liberal and radical views of what should be done? With which do you agree and why?

Answer 1

1 - Pollution is a type of the negative externality which leads to the market failure and the creation of the deadweight losses.

Market failure is the condition when the market is not efficient and the efficient allocation of the goods does not take place. In other words the quantity of goods supplied is not equal to the goods demanded. In the negative externality such as the pollution , the market output produced is greater than the socially optimal output or the output which society will demand to establish equlibrium. Thus this leads to disrupted allocation of goods leading to the market failure.