Externalities Essay

1641 WordsMar 10, 20127 Pages
REASONS WHY GOVERNMENT INTERVENE TO PROVIDE SOCIAL SERVICES SUCH AS HEALTH AND EDUCATION There may be times when market will not function well which end up leading to market failure, this exist when the operation of a market does not lead to economic efficiency (presence of both productive and allocative efficiency). A free market may fail to deliver either productive or allocative efficiency (or both). Resources are thus not being used in the best possible way in that market therefore causing market failure. However a government might intervene in a market because it wants to prevent market failure and also to achieve a fair equitable distribution of resources in economy. The first intervention occurs when markets do not allocate resources efficiently and the second is concerned with ensuring that all members of society have fair access to good and services. However, a problem could clearly arise if someone else, not party to the economic decision, is affected by that decision. This is the economics concept known as externality. An externality is said to arise if a third party (someone not directly involved) is affected by the decision actions of others. If I decide to shout to my friend in public, then others (third party) not involved in making that decision are affected by the assault on their ear drums. Externalities could either be negative or positive e.g. if the benefit exceed total cost it is positive externalities if otherwise, negative externalities, the problem with externality with externalities is too much of a product is produced since it only considers private cost or too little if it only considers private benefit. The fact that negative externalities does not take external cost which is the cost to the society and positive externalities does not take external benefit which is the benefit to the society into account makes the market

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