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- 1 External market failure can be a matter of grave concern in the financial arena.
- 2 The use of Coase theorem can be a saviour in dealing through market failure.
META DESCRIPTION: In this article, we will be deeply discussing the external causes of market failures. Can the government be the potential solution to market failure? And how does the Coase theorem bring out the potential solution to these market failures?
The government has come through to rescue an external market failure. We will be combining the Coase theorem knowledge to provide solutions on how to tackle these problems that come with external Market Failure.
Market Failure
Market failure is basically defined as the slow distribution of commodities and services in the market. Supply and demand usually affect the market; if the price of goods and services is compromised, there will be a change in price equilibrium. Therefore, market failure occurs when there is no balance in the market. For instance, if the amount of goods and services supplied in the market is less than the amount of goods and services required in the market, this leads to disequilibrium. Thus, this affects the market in terms of price limits or government regulation, thus leading to market failure.
External Causes Of Market Failure
External causes are also referred to as externalities, but what are externalities? An externality is a cost or interest that comes as a result of a transaction and affects a third party who was not intended to benefit from the transaction. These consequences are our day-to-day economic activities, and they can affect the market either positively or negatively. For instance, we believe that if the government provides good education to its citizens, the students will benefit, and the benefit will affect society at the same time.
Generally, the people who are affected by externalities are usually third parties. They never choose to benefit from them and have no control over these costs or benefits. Therefore, the people who are responsible for managing these externalities are the ones generating them. Now that we have understood what externalities are, what are the positive and negative causes of these externalities?
Negative Effect of Market Failure
Environment Pollution
Pollution is a negative effect that affects society and people living in industrial areas. When industries emit their gases, society tends to be affected by SO2, affecting the GDP of the market. The firm may not feel the cost since industries may try to limit their production costs by taking measures that might have harmful consequences for the environment and society at large. Although this may decrease the production cost while increasing revenue, market failure will still be witnessed since it affects society and the environment’s welfare.
Agricultural Problems
Agriculture is one of the most important industries in terms of the economy, yet it is also one of the most difficult industries. This often leads to market failure. Technology has really brought development to agriculture, from shearing machines to modern fertilizers and modern ways of spraying pesticides on farms. The side effects of this modern fertilizer are that it pollutes the environment and soil pollution.
Normally, farmers intend to produce a quality product, but technology has brought competition to farmers, leading to the use of excessive modern fertilizers that affect society environmentally. Remember that farmers have poultry and domestic animals that pollute the environments that individuals stay in. Poultry may tend to cause noise pollution for their neighbors. Many farming methods have led to the cutting of trees, which, in the case of heavy rain, will lead to flooding.
Positive Effect of Market Failure
Technology
We all know what technology is, right? Technology has made the world a small village and has caused some positive market failures in economics. Technology has brought better production and quality products to consumers. Let’s say an engineer innovates a machine that makes production more efficient, and it’s shared among the people around to improve their production. For instance, let’s look at social media, where firms and industries can advertise products through Facebook, Twitter, YouTube, and Instagram and reach everyone at once. When companies share technology to improve production, it positively affects society, thus creating a positive market failure.
Education
Innovation in education has brought positive vibes to the market. For instance, parents take their kids to college and universities for them to acquire better skills. The students are provided with skills and knowledge on how to provide better goods and services to society. This will result in individuals looking for educational products {books) that will improve their skills.
A better example is a doctor. Doctors are educated on how to treat individuals and make their health better. They later bring their skills to healthcare and use them in society, leading to positive market failure. Another example is musicians, who are known for providing entertainment. They will learn how to play the keyboard and guitar and later provide entertainment to society, providing positive market failure.
Potential Government Intervention in Market Failure
Government intervention is the process by which the government is involved in the market to have an impact on demand and supply. In this section, we will be diving into how subsidies affect market failure.
Subsidies are money paid directly to industries and firms by the government. In this case, the government provides money for production costs and offers industries tax credits, thus encouraging the industries to increase production and consumption in the market. The government implies subsidies for industries, allowing them to increase their goods and services for consumers. This will increase the number of goods supplied countrywide and the quality of service. Theoretically, when the government offers subsidies to industry, they create a win-win situation. Therefore, this benefits both consumers and industries. If the price of goods increases and production also increases, the firm makes a profit while consumers enjoy quality products.
Coase Theorem Potential Solution to Market Failure
Coase theorem explains that if the market encounters incapabilities from externalities, then private industries can reach an agreement that is socially acceptable and mutually beneficial as long as there is no negotiation fee required in the process of negotiation. The outcome of the negotiation is expected to come to an agreement, regardless of their initial agreement.
The Coase theorem further explains that externality problems can be solved without government intervention only if the two firms can come to an agreement on perfect market competition, regardless of their initial rights.
Conclusion
With these issues being mentioned, we can therefore attest that the Coase theorem will provide a wide range of solutions to Market failure. The government’s intervention in market failures has also brought several solutions. Investors do not need to worry anymore about external factors that will negatively affect their businesses.
With a background in journalism, Ritika Sharma has worked with many reputed media firms focusing on general news such as politics and crime. She joined The Coin Republic as a reporter for crypto, and found a great passion for cryptocurrency, Web3, NFTs and other digital assets. She spends a lot of time researching and delving deeper into these concepts around the clock, and is a strong advocate for women in STEM.
