Answer to Question #65701 in Economics of Enterprise for alexa
Critics have charged that the market economy (1) fails to provide goods and service that are needed yet are unprofitable and (2) imposes certain harmful effects, or “externalities,” upon the public at no expense to those who caused them.
Explain these arguments
Tell whether you agree or disagree with them and why
(1) Free market fails to provide some goods that are in demand but can’t be supplied by private market because of unprofitability. Price mechanism fails to stimulate production of such goods as they are non-excludable and non-rival. That means that people can use this good even if they don’t pay for it and quantity of this good will not decrease with increase in consumption.
I agree with this argument because indeed firms have no stimulus to produce goods that everyone can use without paying for. For example, only government can supply street lighting or provide national defense.
(2) Other type of goods may be produced with marginal private costs that are smaller than social ones. Negative externalities appear when society has to pay expenses that the producer hasn’t paid for (i.g. air pollution).
I agree with the second argument also. Market equilibrium emerges from supply based on private costs and benefits, but optimum quantity of output will be lower as total costs include negative externalities.