Market Failures

Do you agree with the following statement? “Efficiency cannot be achieved when externalities exist.” Explain your view. ANSWER AND THEN REPLY TO MY CLASSMATE’S RESPONSE TO THE ABOVE QUESTION AND EXPLAIN WHY YOU AGREE? (A MINIMUM OF 200 WORDS EACH POST CLASSMATE’S POST My perspective is that when market flaws exist, the efficiency when there are significant externalities creating market failures. I suppose when negative externalities are present, it means that the producer does not bear all costs resulting in excess production. While with positive externalities the buyer does not get all the benefits of the good resulting in decreased production. For instance, of a negative externality is a factory that produces widgets but pollutes the environment in the process.

The cost of the pollution isn’t borne by the factory however shared by society. If the negative externality is taken under consideration, then the cost of the widget would be higher. This would result in decreased production and a more efficient equilibrium. In this case, the market failure would be an excessive amount of production and a price that didn’t match the true cost of production as well as high levels of pollution. In conclusion, externalities lead to market failure because the price equilibrium does not accurately reflect the true costs and benefits of a product. Equilibrium is meant to ensue in the optimal level of production as it finds the ideal balance between buyers’ benefit and producers’ cost.  Reference: Boundless. “Boundless Economics.” Lumen, courses.lumenlearning.com/boundless-economics/chapter/introducing-market-failure/. For more information on Market Failures  read this: https://en.wikipedia.org/wiki/Market_failure

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