Answer to Question #82326 in Microeconomics for priscilla

Question

Using appropriate examples, explain why the existence of negative externalities and public good causes market failure.

Answer 1

Market failure is the economic situation defined by an inefficient distribution of goods and services in the free market. Furthermore, the individual incentives for rational behavior do not lead to rational outcomes for the group.

Traffic congestion is an example of market failure that incorporates both non-excludability and externality. Public roads are common resources that are available for the entire population's use (non-excludable), and act as a complement to cars (the more roads there are, the more useful cars become). Because there is very low cost but high benefit to individual drivers in using the roads, the roads become congested, decreasing their usefulness to society. Furthermore, driving can impose hidden costs on society through pollution (externality). Solutions for this include public transportation, congestion pricing, tolls, and other ways of making the driver include the social cost in the decision to drive.

Source:

https://www.econlib.org/library/Topics/College/marketfailures.html

https://en.wikipedia.org/wiki/Market_failure#Externalities