How market failures resulting from externalities rationalize the economic functions performed by the government?

Question

Want to see more full solutions like this?

Answer 1

Question

Chapter 5, Problem 5.1LO

To determine

How market failures resulting from externalities rationalize the economic functions performed by the government?

Expert Solution & Answer

Explanation of Solution

Externalities can be of two types : positive externality and negative externality.

Positive externality involves an external benefit that the market fails to recognize. An excellent example of positive externality is education. Not only does the person getting educated benefit, but also the entire society as a result of one more educated person amidst them. The market tends to undervalue such a commodity that bestows external benefits on the society. As a result, suppliers are unwilling to produce sufficient quantities of it. Therefore, there is suboptimal production. Thus, quite clearly, the market fails to allocate resources optimally to the production of a commodity with positive externalities. In such a situation, the government intervention is warranted. Government can offer subsidies to encourage consumption of such a commodity. The resultant greater demand will push the price of the commodity up that, in turn, motivates the producers to allocate more resources and produce more of it. Thus, market failure is overcome through government intervention.

Negative externality involves an external cost that the market ignores. An apt example of negative externality is pollution. Smoke and fumes emitted by factories result in air pollution that entails huge costs for the entire society in the form of respiratory problems. The market overvalues such a commodity that imposes external cost on the society. As a result, suppliers are willing to produce more of such a commodity than what is desirable for the society. Thus, the market fails to allocate resources optimally to the production of a commodity with negative externalities. In such a situation, government intervention is justified. Government can levy taxes to discourage production of such a commodity. Taxes, by increasing the cost of production, and thereby this decreases supply. As a result, the price of the commodity rises and motivates consumers to demand less of it. Thus, once again, market failure is overcome through government intervention.

Thus, market failures rationalize economic actions of the government.

Economics Concept Introduction

Introduction:

Externality: This refers to either a harm caused to or a benefit conferred on society by individuals or firms through their actions.

Market failure: It refers to a situation in which the market is unable to allocate resources optimally due to the presence of externalities.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Students have asked these similar questions

According to Lee et al. (2009), the incremental cost-effectiveness ratio comparing the current dialysis treatment to the next least cost dialysis treatment is $61,294 per life year and $129,090 per QALY. Can you account for the different estimates?

You are employed as an economic consultant to the regional planning office of a large metropolitan area, and your task is to estimate the demand for hospital services in the area. Your estimates indicate that the own-price elasticity of demand equals 0.25, the income elasticity of demand equals 0.45, the cross-price elasticity of demand for hospital services with respect to the price of nursing home services equals 0.1, and the elasticity of travel time equals −0.37. Use this information to project the impact of the following changes on the demand for hospital services. Average travel time to the hospital diminishes by 5 percent due to overall improvements in the public transportation system. The price of nursing home care decreases by 10 percent. Average real income decreases by 10 percent. The hospital is forced to increase its price for services by 2 percent.

The commissioner of health is concerned about the increasing number of reported cases of preventable childhood diseases, such as polio and rubella. It appears that a growing number of young children are not being vaccinated against childhood diseases as they should be. Two proposals to address the problem are sitting on the commissioner’s desk. The programs have equal costs, but the commissioner has funding for only one. The first proposal involves providing free vaccinations at clinics around the country. The benefits from a free vaccination program are likely to be experienced immediately in terms of a drop in the number of reported cases of illness. The second program calls for educating young married couples about the benefits of vaccination. The benefits in this instance will not be felt for some years. The commissioner wants to use cost-benefit analysis to determine which proposal should be implemented. Explain to the commissioner the critical role the discount rate plays in…

Answer 2

Question

Chapter 5, Problem 5.1LO

To determine

How market failures resulting from externalities rationalize the economic functions performed by the government?

Expert Solution & Answer

Explanation of Solution

Externalities can be of two types : positive externality and negative externality.

Positive externality involves an external benefit that the market fails to recognize. An excellent example of positive externality is education. Not only does the person getting educated benefit, but also the entire society as a result of one more educated person amidst them. The market tends to undervalue such a commodity that bestows external benefits on the society. As a result, suppliers are unwilling to produce sufficient quantities of it. Therefore, there is suboptimal production. Thus, quite clearly, the market fails to allocate resources optimally to the production of a commodity with positive externalities. In such a situation, the government intervention is warranted. Government can offer subsidies to encourage consumption of such a commodity. The resultant greater demand will push the price of the commodity up that, in turn, motivates the producers to allocate more resources and produce more of it. Thus, market failure is overcome through government intervention.

Negative externality involves an external cost that the market ignores. An apt example of negative externality is pollution. Smoke and fumes emitted by factories result in air pollution that entails huge costs for the entire society in the form of respiratory problems. The market overvalues such a commodity that imposes external cost on the society. As a result, suppliers are willing to produce more of such a commodity than what is desirable for the society. Thus, the market fails to allocate resources optimally to the production of a commodity with negative externalities. In such a situation, government intervention is justified. Government can levy taxes to discourage production of such a commodity. Taxes, by increasing the cost of production, and thereby this decreases supply. As a result, the price of the commodity rises and motivates consumers to demand less of it. Thus, once again, market failure is overcome through government intervention.

Thus, market failures rationalize economic actions of the government.

Economics Concept Introduction

Introduction:

Externality: This refers to either a harm caused to or a benefit conferred on society by individuals or firms through their actions.

Market failure: It refers to a situation in which the market is unable to allocate resources optimally due to the presence of externalities.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 3

Question

Chapter 5, Problem 5.1LO

To determine

How market failures resulting from externalities rationalize the economic functions performed by the government?

Expert Solution & Answer

Explanation of Solution

Externalities can be of two types : positive externality and negative externality.

Positive externality involves an external benefit that the market fails to recognize. An excellent example of positive externality is education. Not only does the person getting educated benefit, but also the entire society as a result of one more educated person amidst them. The market tends to undervalue such a commodity that bestows external benefits on the society. As a result, suppliers are unwilling to produce sufficient quantities of it. Therefore, there is suboptimal production. Thus, quite clearly, the market fails to allocate resources optimally to the production of a commodity with positive externalities. In such a situation, the government intervention is warranted. Government can offer subsidies to encourage consumption of such a commodity. The resultant greater demand will push the price of the commodity up that, in turn, motivates the producers to allocate more resources and produce more of it. Thus, market failure is overcome through government intervention.

Negative externality involves an external cost that the market ignores. An apt example of negative externality is pollution. Smoke and fumes emitted by factories result in air pollution that entails huge costs for the entire society in the form of respiratory problems. The market overvalues such a commodity that imposes external cost on the society. As a result, suppliers are willing to produce more of such a commodity than what is desirable for the society. Thus, the market fails to allocate resources optimally to the production of a commodity with negative externalities. In such a situation, government intervention is justified. Government can levy taxes to discourage production of such a commodity. Taxes, by increasing the cost of production, and thereby this decreases supply. As a result, the price of the commodity rises and motivates consumers to demand less of it. Thus, once again, market failure is overcome through government intervention.

Thus, market failures rationalize economic actions of the government.

Economics Concept Introduction

Introduction:

Externality: This refers to either a harm caused to or a benefit conferred on society by individuals or firms through their actions.

Market failure: It refers to a situation in which the market is unable to allocate resources optimally due to the presence of externalities.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Question

Chapter 5, Problem 5.1LO

To determine

How market failures resulting from externalities rationalize the economic functions performed by the government?

Expert Solution & Answer

Explanation of Solution

Externalities can be of two types : positive externality and negative externality.

Positive externality involves an external benefit that the market fails to recognize. An excellent example of positive externality is education. Not only does the person getting educated benefit, but also the entire society as a result of one more educated person amidst them. The market tends to undervalue such a commodity that bestows external benefits on the society. As a result, suppliers are unwilling to produce sufficient quantities of it. Therefore, there is suboptimal production. Thus, quite clearly, the market fails to allocate resources optimally to the production of a commodity with positive externalities. In such a situation, the government intervention is warranted. Government can offer subsidies to encourage consumption of such a commodity. The resultant greater demand will push the price of the commodity up that, in turn, motivates the producers to allocate more resources and produce more of it. Thus, market failure is overcome through government intervention.

Negative externality involves an external cost that the market ignores. An apt example of negative externality is pollution. Smoke and fumes emitted by factories result in air pollution that entails huge costs for the entire society in the form of respiratory problems. The market overvalues such a commodity that imposes external cost on the society. As a result, suppliers are willing to produce more of such a commodity than what is desirable for the society. Thus, the market fails to allocate resources optimally to the production of a commodity with negative externalities. In such a situation, government intervention is justified. Government can levy taxes to discourage production of such a commodity. Taxes, by increasing the cost of production, and thereby this decreases supply. As a result, the price of the commodity rises and motivates consumers to demand less of it. Thus, once again, market failure is overcome through government intervention.

Thus, market failures rationalize economic actions of the government.

Economics Concept Introduction

Introduction:

Externality: This refers to either a harm caused to or a benefit conferred on society by individuals or firms through their actions.

Market failure: It refers to a situation in which the market is unable to allocate resources optimally due to the presence of externalities.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 5, Problem 5.1LO

To determine

How market failures resulting from externalities rationalize the economic functions performed by the government?

Expert Solution & Answer

Explanation of Solution

Externalities can be of two types : positive externality and negative externality.

Positive externality involves an external benefit that the market fails to recognize. An excellent example of positive externality is education. Not only does the person getting educated benefit, but also the entire society as a result of one more educated person amidst them. The market tends to undervalue such a commodity that bestows external benefits on the society. As a result, suppliers are unwilling to produce sufficient quantities of it. Therefore, there is suboptimal production. Thus, quite clearly, the market fails to allocate resources optimally to the production of a commodity with positive externalities. In such a situation, the government intervention is warranted. Government can offer subsidies to encourage consumption of such a commodity. The resultant greater demand will push the price of the commodity up that, in turn, motivates the producers to allocate more resources and produce more of it. Thus, market failure is overcome through government intervention.

Negative externality involves an external cost that the market ignores. An apt example of negative externality is pollution. Smoke and fumes emitted by factories result in air pollution that entails huge costs for the entire society in the form of respiratory problems. The market overvalues such a commodity that imposes external cost on the society. As a result, suppliers are willing to produce more of such a commodity than what is desirable for the society. Thus, the market fails to allocate resources optimally to the production of a commodity with negative externalities. In such a situation, government intervention is justified. Government can levy taxes to discourage production of such a commodity. Taxes, by increasing the cost of production, and thereby this decreases supply. As a result, the price of the commodity rises and motivates consumers to demand less of it. Thus, once again, market failure is overcome through government intervention.

Thus, market failures rationalize economic actions of the government.

Economics Concept Introduction

Introduction:

Externality: This refers to either a harm caused to or a benefit conferred on society by individuals or firms through their actions.

Market failure: It refers to a situation in which the market is unable to allocate resources optimally due to the presence of externalities.

Answer 6

Chapter 5, Problem 5.1LO

To determine

How market failures resulting from externalities rationalize the economic functions performed by the government?

Expert Solution & Answer

Explanation of Solution

Externalities can be of two types : positive externality and negative externality.

Positive externality involves an external benefit that the market fails to recognize. An excellent example of positive externality is education. Not only does the person getting educated benefit, but also the entire society as a result of one more educated person amidst them. The market tends to undervalue such a commodity that bestows external benefits on the society. As a result, suppliers are unwilling to produce sufficient quantities of it. Therefore, there is suboptimal production. Thus, quite clearly, the market fails to allocate resources optimally to the production of a commodity with positive externalities. In such a situation, the government intervention is warranted. Government can offer subsidies to encourage consumption of such a commodity. The resultant greater demand will push the price of the commodity up that, in turn, motivates the producers to allocate more resources and produce more of it. Thus, market failure is overcome through government intervention.

Negative externality involves an external cost that the market ignores. An apt example of negative externality is pollution. Smoke and fumes emitted by factories result in air pollution that entails huge costs for the entire society in the form of respiratory problems. The market overvalues such a commodity that imposes external cost on the society. As a result, suppliers are willing to produce more of such a commodity than what is desirable for the society. Thus, the market fails to allocate resources optimally to the production of a commodity with negative externalities. In such a situation, government intervention is justified. Government can levy taxes to discourage production of such a commodity. Taxes, by increasing the cost of production, and thereby this decreases supply. As a result, the price of the commodity rises and motivates consumers to demand less of it. Thus, once again, market failure is overcome through government intervention.

Thus, market failures rationalize economic actions of the government.

Economics Concept Introduction

Introduction:

Externality: This refers to either a harm caused to or a benefit conferred on society by individuals or firms through their actions.

Market failure: It refers to a situation in which the market is unable to allocate resources optimally due to the presence of externalities.

Answer 7

Chapter 5, Problem 5.1LO

To determine

How market failures resulting from externalities rationalize the economic functions performed by the government?

Answer 8

Expert Solution & Answer

Explanation of Solution

Externalities can be of two types : positive externality and negative externality.

Positive externality involves an external benefit that the market fails to recognize. An excellent example of positive externality is education. Not only does the person getting educated benefit, but also the entire society as a result of one more educated person amidst them. The market tends to undervalue such a commodity that bestows external benefits on the society. As a result, suppliers are unwilling to produce sufficient quantities of it. Therefore, there is suboptimal production. Thus, quite clearly, the market fails to allocate resources optimally to the production of a commodity with positive externalities. In such a situation, the government intervention is warranted. Government can offer subsidies to encourage consumption of such a commodity. The resultant greater demand will push the price of the commodity up that, in turn, motivates the producers to allocate more resources and produce more of it. Thus, market failure is overcome through government intervention.

Negative externality involves an external cost that the market ignores. An apt example of negative externality is pollution. Smoke and fumes emitted by factories result in air pollution that entails huge costs for the entire society in the form of respiratory problems. The market overvalues such a commodity that imposes external cost on the society. As a result, suppliers are willing to produce more of such a commodity than what is desirable for the society. Thus, the market fails to allocate resources optimally to the production of a commodity with negative externalities. In such a situation, government intervention is justified. Government can levy taxes to discourage production of such a commodity. Taxes, by increasing the cost of production, and thereby this decreases supply. As a result, the price of the commodity rises and motivates consumers to demand less of it. Thus, once again, market failure is overcome through government intervention.

Thus, market failures rationalize economic actions of the government.

Answer 9

Expert Solution & Answer

Answer 10

Expert Solution & Answer

Answer 11

Economics Concept Introduction

Introduction:

Externality: This refers to either a harm caused to or a benefit conferred on society by individuals or firms through their actions.

Market failure: It refers to a situation in which the market is unable to allocate resources optimally due to the presence of externalities.

Answer 12

Ch. 5 - Prob. 5.1LO Ch. 5 - Prob. 5.2LO Ch. 5 - Prob. 5.3LO Ch. 5 - Prob. 5.4LO Ch. 5 - Prob. 5.5LO Ch. 5 - Prob. aFCT Ch. 5 - Prob. bFCT Ch. 5 - Prob. cFCT Ch. 5 - Prob. dFCT Ch. 5 - Prob. eFCT

How market failures resulting from externalities rationalize the economic functions performed by the government?

How market failures resulting from externalities rationalize the economic functions performed by the government?

Explanation of Solution

Want to see more full solutions like this?

Chapter 5 Solutions