Externalities - market failure

Market Failure

• When the price mechanism causes and inefficient allocation of resources; the forces of supply + demand lead to a net welfare loss in society

• Situation where the free market fails to allocate resources efficiently, resulting in a net welfare loss

Free market

• No government intervention

Misallocation of Resources

• Where resources (eg. finance, labour, tech, property) are distributed in a way that creates a mis - match between productivity + share of the economy

Government Intervention

• When the government acts to share the market by using one or more of a range of strategies (eg, by legislation, policies, taxes, financial support, advice + business support to expand internationally)

Externalities

• A “knock on effect” (cost or benefit) to a 3rd party that arises out of business activities

Positive Externalities

• Bees of a honey farm pollinate crops of neighbouring farm

• Run down area is redeveloped, benefitting anyone who lives nearby with a more attractive view + better facilities

• New software is developed. Business who buys it becomes more efficient + can lower prices to customers

Negative Externalities

• A factory creates air pollution, which impacts local residents, especially those with respiratory conditions

• New school / office block under construction causes a long time of noise pollution for those living + working nearby

• Impact of gambling addiction on family life + social cohesion