Externality Assignment Example | Topics and Well Written Essays - 1000 words

Externality - Assignment Example When economies have competition and no externalities, the markets will allocate resources in order to maximize the surplus available. However, when or if these conditions are not met, market failure may occur, as the market has not achieved the optimal outcome. If the parties involved can bargain without cost over the allocated resources, then the private market will always solve the problem of externalities. However, we realize this is not the case in all circumstances and therefore may require government means of intervention to correct the imbalance. Market failures in this case are failures only in the limited sense that they involve transaction costs that can be weakened by substituting internal organization for market exchange. (Unknown Author. â€Å"Market Failures and Externalities.† BasicEconomics.info). Market failures are affected by all of the following: static markets, contractual incompleteness, strategic misrepresentation risk, information processing effects, an d institutional adaptations. (Williamson Oliver E., The American Economic Review). These influences all play an integral role in the steps to market failure. The justification for government intervention usually comes about as a result of market failure within a particular market. This government intervention is implemented through the means of public policy, taxes, subsidies, bailouts, regulations, and wage and price controls. The government may also include attempts to correct market failure through the re-allocation of resources. A prime example of this would be the recent government bailouts and stimulus packages put together by Obama and Congress. There are several different perspectives about the cause of market failure, but market failure will always occur if there the market is ‘monopolized’ or a small group of businesses hold significant power. Some market failures are also due to the nature of the good or service being a public good. Negative externalities aff ect social cost much greater than the private cost. A great example of this would be the seat belt law and helmet law for motorcyclists. There are several times when we have sat in a car and wondered why should I put my seat belt on? I am only riding around the corner†¦ People have often questioned whether the government has the right to tell someone to put on their seat belt or wear a helmet when riding. The negative externality is derived from the scientific data that shows us that people involved in automobile accidents that wear seat belts and helmets have much less greater injuries than those that do not. These safety devises can greatly reduce fatalities associated with the incidents. Society as a whole, often times must foot the bill of these injuries through tax dollars because many of the people involved in these crashes do not have enough insurance. When you add medical bills, missed work, disabilities, and foster care- the social burden can become quite great. Also a lot of the funding that goes behind programs is tied to safety compliance. (Unknown Author. Cals.ncsu.edu) A great example of a positive externality would be the new green energy initiative that is taking place. In the past couple of years, the U.S. government has dramatically stressed the importance of fuel independence from the Middle East, and has sought ways