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  • Essay / What is market failure? - 660

    Market failure, a term frequently used by microeconomists, is used when a market does not spend its resources efficiently in a free market. In the article in question, market failure is achieved, but in this case it operates inefficiently by creating negative externalities. Negative externalities are defined as the situation in which a product costs society more than its private costs. Throughout the article, it becomes clear that a significant production externality is occurring. This becomes evident because clothing production in Bangladesh has caused over 1,000 proven deaths and no private payment will ever be able to cover this cost to society, which is a clear case of market failure, more specifically of negative externality of production. It must be taken into account that not only has the social price already been irreversibly exceeded, but it is gradually and slowly getting worse. The diagram on the right shows a negative production externality depending on the microeconomic situation found in the article. It must be taken into account that MPB (marginal private benefit) and MSB (marginal social benefit) are considered as demand. As noted, MPC (marginal private cost) exceeds MSC (marginal social cost). This creates excess supply and thus shifts Qopt towards Qm, removing the quantity of what is optimally required by society and creating a market failure. On the other hand, the price changed from Popt to Pm, thus creating the external cost shown between MPC and MSC. It is through the diagram that it becomes clear that producers are in fact overproducing due to the external costs that society must pay. In this case however, the cost paid by society manifests itself in the deterioration of health (and death) of the population of Bangladesh. Regardless of what economic theory might say, the effects of Bangladesh's factories are too negative for optimal impact. level of production to exist. This means that there is no amount of supply that should exist, given the repercussions. “In Savar, we have a lot of coconut trees, but they no longer produce coconuts. Industrial pollution damages our fish stocks, our fruits and vegetables. » In this case, externalities cannot be measured precisely because health is only a negative aspect of the problem. In response to the negative externality identified, some solutions could be useful to deal with the excess marginal social cost..