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+--- Thread: How is pollution a market failure? (/thread-51598.html)
How is pollution a market failure? - Jake Johnson - 12-16-2012 10:19 AM
I understand that pollution is a negative externality and there is a market failure. But in this sense, how is a pollution a market failure? Market failure is when resources are allocated inefficiently however I do not understand how pollution is allocating resources inefficiently.
When firms produce to their max with coal, and therefore produce tons of pollution, the firms aren't exactly losing anything. They still produce their max and will have high profits.
Is my entire sense of market failure wrong? Can someone please provide an explanation of HOW pollution, or merit goods be a market failure?
- Smilingafterthought242 - 12-16-2012 10:27 AM
it is market failure because the market fails to take into account the cost of this negative externality - this is because it does not represent a cost to the producer. as you said, they arent losing anything. the price mechanism doesnt take into account social costs i.e. costs that are born by everybody.
the price would be higher if the market took into account this cost therefore resources are allocated inefficiently
hope that makes sense =]