How does car pollution cause Market failure?Watch this thread
I think its because of the negative externalities that come about because of it, like the extra social cost of the pollution doing harm to health and the local environment,so it will be costly.
ok cool, i know these are dead basic q's, but how exactly do i explain that neg ex's are market failure? because isn't market failure about allocation of resources?
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"Market failure has become an increasingly important topic for students at A level .There is a clear economic case for government intervention in markets where some form of market failure is taking place. Government can justify this by saying that intervention is in the public interest. Basically market failure occurs when markets do not bring about economic efficiency.
Government intervention occurs when markets are not working optimally i.e. there is a Pareto sub-optimal allocation of resources in a market/industry. In simple terms, the market may not always allocate scarce resources efficiently in a way that achieves the highest total social welfare."
The Market equilibrium is not the socially optimum output. Therefore the Market has failed tO allocate resources properly.
When someone decides to use their car they will compare the private benefit with using their car for that journey, with the private cost (cost of the petrol and other things needed to run the car). If the private benefit > private cost they will use it.
However there will be a social benefit to that use of the car which will be the private benefit plus any externality (if they are driving to work and society benefits from that person being at work then there is a positive externality that goes to other people than the person getting private benefit). There will also be a social cost to that use of the car which will be the private cost plus any externality (eg the negative effects on the environment by pollution). If the social benefit < social cost then it is not efficient for society for that journey to be made, whilst it may be efficient for the individual.
If there was a market for the pollution so the individual incurred privately the costs to society (and if the individual could benefit privately from all the social benefits of the journey) then the market would result in an efficient allocation of resources because the individual would only drive the car if the social benefit >= the social cost