Economic essay 10
Marketingfailures and exceptions
The1stsituation is about a company A that deals with production of cementsifters in a process that entails melting of chemicals and metalsthat give the sifters their strength. The production process resultsin the release of wastes into rivers that runs alongside the firm.The type of market failure is under the category of negativeexternalities. A negative externality marketing failure is one of thenegative externality. It is defined as a cost that a third partyexperienced as one of the consequence of business and economictransaction. In an economic transaction, the consumer and theproducer are the 1stand the 2ndparties while the third parties involve organizations, individuals,resources and property owners that are affected indirectly.Externalities are also known as spillover effects with negativeexternality also known as external cost. Externalities such asemission of industrial wastes often arise from production processesat the industries. The situation may commonly take place insituations where property rights targeting resources or assets havebeen allocated or are considered uncertain(Batabyal& Nijkamp, 2014).
Disposalof industrial wastes into rivers may result to water pollutionthrough sediments, excessive nutrients and toxic chemicals oftenresult to water pollution. Many more costs may take place as a resultof negative impact towards fisheries based economies, recreationalactivities and tourism activities. Release of wastes into rivers willoften affect the third parties that may include the community membersas well as fisheries. The community utilizes water for variousactivities such as domestic and industrial uses. Polluted water isoften unfit for human consumption and domestic utilization. There isan also increased cost that is often needed to treat the water tomake it fit for human consumption. The third parties often suffer asa result of the self interests of the firms. The firm is onlyconcerned about the positive effects of pollution but fails torecognize the negative effects that are associated with the issue ofpollution. There are various remedies that can be utilized to ensurethat firm A takes considerations of both the negative and positiveimpacts of the production process. The government may decide toeither cancel the company’s license of operation or use its powersto impose the highest penalty that is possible to stop the companyfrom continuous deposition of the wastes into the water sources. Mostcompanies have faced huge fines that have been associated with thedumping of industrial wastes into rivers(Batabyal& Nijkamp, 2014).A good example is the general electric company in the United Statesthat currently faces huge fines of up to hundreds of millions ofdollars as a consequence of dumping wastes into the Hudson River.
Firmsor business entities that are self-interested will not consider thetotal cost of pollution that they are able to create during theproduction of process and will continue to emit excessive pollutantsunless the government is able to take initiatives aimed atdiscouraging such companies from doing so. In order to help solvesuch a problem, the government will be forced to impose a correctivetax towards firm A increase in the amount of corrective tax willresult to the firms being careful and concerned about the pollutionissue and therefore effective measures will be taken to help reducethe issue of pollution. If the government decides to imposecorrective tax that is large enough for the firms or factories tobear, the approach may result to the closure of their closurereducing pollution to zero (Mankiw,2012).
Thesituation is about some states in the country allowing students toattend certain institutions of higher learning within the statetuition free in cases where they are residents of that particularstate. The move has led to the population of the state becoming moreproductive and educated as compared to the other states without suchinitiatives. The approach is an example of a positive externality. Apositive externality is a reward that is enjoyed by the third partyas a consequence of economic transaction. Third parties in such asituation include owners of properties, organizations, individualsand resources that are affected indirectly. Even though people whobenefits from the rewards of positive externalities without paymentare considered as free riders, it is in the society’s interest toencourage free-riders to utilize goods or opportunities that ends upgenerating substantial external benefits (Mankiw,2012).
Offeringscholarships by the government or other institutions of learning isoften significant to the society as a result of the increased levelof illiteracy and the benefits that are associated with it. Stateswith more educated people are more developed as a result of educatedand highly experienced labor force improved education has resultedto more educated populations that result to voters that are moreinformed. High level of illiteracy in the state has led to reducedlevel of crime with educated populations encouraging disseminationand development of advances in technology. Most merit goods oftenlead to positive externalities in which beneficiaries are do not payfor. The move by the state to allow students to study tuition free insome of the universities that belong to the state will ensure thatmore people in the state are educated. The overall benefits, however,will be associated with the state. The state should also put intoconsideration the negative effects of positive externalities. In anevent where positive externalities exist in the society, the serviceor good may be underprovided or under-consumed since the free marketoften fails to value the resources in a correct manner or take theminto consideration when the product is priced. The state shouldtherefore come up with initiatives that will ensure quality servicesare being provided.
Thestate will have an increased number of people who are more illiterateand will offer better knowledge for the growth of the state. The moveby the state will result to both acquisitions of skills and knowledgethat will have far reaching benefits to the society. unlikesituations that are often associated with negative externalities,which has to discouraged in order to achieve allocation of resourcesthat may be considered as socially efficient, positive externalitieshas to be encouraged as a result of the many benefits that areassociated with it (Batabyal& Nijkamp, 2014).
Oneof the roles of the state authorities is to ensure that economicpolicies that enhance positive externalities is implemented orencouraged with an aim of increasing demand and supply of resourcesand services that will generate external benefits. Demand and supplyfor goods or resources that generate positive externalities should beencouraged through reduction of the price that is often paid to theconsumer. Subsidizing the tuition fees or the move taken by the statein ensuring that individuals or students that were born in the stateare acquire scholarships to study in the universities, free of chargewill encourage more people to join the university and become moreeducated hence resulting to a positive externality for thegenerations in the future. In order to move the market equilibriumtowards a social optimum, a positive externality often requires asubsidy. It is in fact the policy that is often followed by thegovernment. Education is often subsidized through governmentscholarships and public schools (Batabyal& Nijkamp, 2014).
The3rdsituation is about a sub-division with a short dirt road whichprovides access to every home in the region. One of the residents bythe name Bob has inherited a large sum of money and makes a personaldecision to have the roads paved without asking the other residentsabout the issue. He however asks the other people in the area to paytheir fair share of the cost incurred in paving the road. The otherpeople have refused to pay. The market failure in such an event isthe free-rider problem or challenge. A free rider is defined as anindividual who receives the reward of a certain good but does not payfor the same. It is often considered easier to think that publicgoods are free to users. In everyday life, people often benefit frompublic goods such as bridges and roads even though there is notransaction that occurs when such goods are being used. Public goodstoo, however, need to be paid. In the cases of bridges and roads,every individual pays taxes to the government. The residents arefree-riding because they are benefiting from a certain resource orgood without making any payment towards the same. Just like publicgoods that are often utilized by people without discrimination, Bob’spaved road is being utilized in the same manner, yet he used his ownmoney to provide the service to the people. The residents should befair to him since and at least pay for their fair share. Thegovernment on the other hand utilizes such taxes to pay for suchgoods. Public goods are often considered as non-excludable andnon-rivalrous. It is the 2ndchallenge, the non excludability which leads to the free riderproblem (Nandeibam,2010).
Thefree-rider challenge is that some people may tend to benefit from acertain resource without paying their resultant share of the cost.Given that public goods are considered non-excludable, free riderssuch as Bob’s neighbors can not only be controlled from utilizingthe goods but do have the incentives to continue utilizing the goodswithout necessarily paying for them. It is unfortunate for Bob,since he was able to pay for the pavement of the road out of his ownmoney and now he is unable to recover the money because the peoplehave decided not to pay. It is not a must for the residents to payhim even though they will be benefiting from the utilization of thepaved road. The best solution for the challenge that is beingexperienced by Bob is that he could have petitioned the authority orthe government for help (Nandeibam,2010).
Thegovernment should remedy the challenge if it decides that the overallbenefits of the public good will have to exceed the resultant costs.The government can provide the public resource or good, pay for itthrough tax revenue as well as make everyone better off. Even thoughthere are regulations that tend to discourage free-riding, Bob mayfail to utilize them given that he is not the government. Thegovernment has powers to prevent free riding through initiatives suchas tax enforcement. The government often ensures that everyindividual is able to pay their cost shares through tax. The threatof jail terms and fines are enough threats that can compel people topay their shares of the public goods through taxes so that they mayno longer be free riders. Bob should have partnered with thegovernment to ensure that other residents are no longer free ridersas they will be able to pay their share of the costs of paving theroad though taxes (Mankiw,2012).
The4thsituation is about the United States’ president determining thecosts that are associated with the national defense which has becomequite expensive. The president has requested the citizens to pay fortheir fair share of the costs that is linked with the nationaldefense in an effort to balance the budget and reduce costs. Thedecision is however supported by one of the advisors while the otheradvisor is against the idea and claims that it will not work. Thenational defense is a good that is valuable to the public and thecitizens of the US. It is neither rival in consumption norexcludable. The market failure in this context is another case of thefree-rider challenge. People cannot be prevented from benefiting fromsuch a resource because it is available to every citizen withoutdiscrimination and that each individual is considered better offwithout it, making the service a positive externality too. A freerider challenge is a problem that affects the provision of publicresources or goods and takes place when an individual benefits orconsumes from a certain good without necessarily making payment.Free-rider problem is the exact reason why public resources or goodsare often produced by the government (Mankiw,2012).
Eventhough the president may seem to be supporting the free-rider conceptby requesting the citizens to volunteer in supporting the nationaldefense, the move may not be the best idea since national defensefalls under public service and it’s the mandate of every citizen inthe United States of America to pay their fair share as a result ofbenefiting from the national defense. I support the presidentialadvisor who believes that the president’s approach may not workout. Being a public good, every citizen in the country will be ableto benefit from it without necessarily making any payment. Thecapital accrued from the voluntary payment as it is being suggestedby the president may not be enough to support the national defensedepartment (Mankiw,2012).The only remedy to finance such a big public service is throughforcing the free-riders and every individual to pay for the servicesthrough government enforced taxes. The free-rider challenge mayresults to market failure and it is the mandate of the government toensure that all the citizens are forced to pay for the services thatare provided by the national defense. The free-rider problem oftentakes place as a result of fundamental nonpayer non excludabilityfeatures of the public goods. Since non-payers can continue tobenefit and consume the public service without payment, they are lesslikely to make voluntary payment as it is being requested by thepresident.
Givena choice of purchasing a private good or service or paying only for apublic good and also receiving a public good for free, most citizenswill choose to purchase the private good while at the same timefree-riding the public good. The president should therefore beadvised to allow all the citizens to pay for national defenseservices through the government initiative aimed at enforcing taxesthat will target all the citizens. Such an initiative will helpprevent free-riding that may result to market failures. The publicoften disagrees on the amount of money that should be spent on thenational defense with nobody doubting that it is necessary. It willbe difficult for the private market or sector to provide the fundsthat are needed since people believe that the national defense is adocket under the public service and that it should be supported bythe government. The best solution to the problem is for thegovernment to increase taxation while at the same time reducespending on national defense(Mankiw, 2012).
Batabyal,A., & Nijkamp, P. (2014). Positive and Negative Externalities inInnovation, Trade, and Regional Economic Growth. GeographicalAnalysis, 46(1), 1-17. doi:10.1111/gean.12027
Mankiw,N. (2012). Principles of economics. Fort Worth, TX: DrydenPress.
Nandeibam,S. (2010). A free-rider problem with a free-riding principal.Economic Design, 1(1), 227-250. doi:10.1007/bf0271662