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Market Failures

Give examples of at least two market failures and explain how they represent challenges to the free market understanding of business's environmental responsibilities.

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Market Failure happens when resources have not been allocated properly according to their efficient use. When there is a market failure in the environment, the cause is usually the existence of negative externalities which means, the effects of the decision of a third party. A few of these market failures are pollution (air, water, etc.) and traffic congestion.

a. Pollution: As a result of the production process, some factories dispose their waste in rivers, streams and sometimes they produce by-products that pollute the atmosphere. Although the producers are aware of the impact of his decision and that the government may give sanctions to those who violate law, there are a few reasons why they continue what they are doing. Among these are as follows: being able to get away with it; they find the cost of disposing the waste too high; and that they are maximizing profits by minimizing their expenses and disposition of waste at least cost is the most efficient thing to do. These producers have ignored the fact that the true cost to society is much higher than the private cost that the producers can incur.

Using the framework of supply and demand, if society wishes to lessen the damage caused by pollution, they have to ...

Solution Summary

The solution discusses two examples of market failures. References are included.