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Market Failures and Exceptions

For each of the following situations, the market system has failed and/or just will not allocate resources efficiently:

Situation 1: Firm A produces cement sifters. The process includes the melting of metals and chemicals which give the sifters strength. In the production process, waste is produced and released into the river that runs alongside of the plant.

Situation 2: Some states allow students to attend certain universities within the state tuition free if they are a resident of that state. As a result of this policy, the state's population is more educated and more productive in the workplace than many other states.

Situation 3: You live in a small subdivision with several residents. The subdivision has one short dirt road that provides access to all the homes. Bob, one of the residents of the subdivision, just inherited a large sum of money and decides to have the road in the subdivision paved. After the paving, Bob asked the other residents to pay their fair share of the costs for the paving, but they all refused.

Situation 4: The President of the United States has determined that the cost associated with national defense has become too expensive. In an effort to reduce costs and balance the budget, the President has asked the public to voluntarily pay for their fair share of the costs associated with national defense. One of his advisors insists that this would not work, another advisor thinks it's good policy. Which advisor is correct?

Required:

For each of the situations above, identify the type(s) of market failure that has occurred. For each situation, explain why or how the failures came about and describe the possible remedies or solutions. Explain your answers and use graphs or diagrams to justify your answers.

Solution Preview

Situation 1: Firm A produces cement sifters. The process includes the melting of metals and chemicals which give the sifters strength. In the production process, waste is produced and released into the river that runs alongside of the plant.

Negative externality is the market failure that will occur in this situation. Releasing of waste into the river will adversely affect third parties such as the community especially the fisher folks. These entities suffer because of Firm A's self-interest.

Two remedies may be implemented to compel Firm A to straighten up its act. First, the government may use its power to impose the highest penalty possible. Second, the government may cancel the firm's license to operate.

Situation 2: Some states allow students to attend certain universities within the ...

Solution Summary

The solution shows scenarios of market failures and a description of how they occur and possible solutions. A 6-page file is attached with detailed discussions and illustrations .

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