Answer to Question #70013 in Macroeconomics for Manmeet Singh

Question

Define, illustrate, and explain with examples market failure in the context of the external costs of production (MSC > MC) of coal fired power station and the external cost of consumption (MSB < MB) of alcohol to the society.

Answer 1

Market failure exists when the competitive outcome of markets is not satisfactory from the point of view of society.When coal is fired to produce electricity, air emissions cause health problems to the local population, resulting in some external costs to minimize those effects (external costs of production). When people consume alcohol, they are at a greater risk to have health problems, resulting in some external costs to minimize those effects (external costs of consumption).