Environmental Sustainability

Market failure is a situation in which the free operation of the market does not result in an efficient allocation of resources. In most cases economists would like to assume that the best way to manage the economy is to stay out of the way and let buyers and sellers find each other. The problem is, even in a perfect situation this doesn’t always work.

For example, consider the fishing stocks that were discussed earlier. If the government did not intervene, then each person who decided to fish for a living would be able to take as many fish as they want. Obviously the best way for me to maximise my own standard of living is to take as many fish as I can – that way I will have more fish to sell. If everyone thought this way then very soon we would run out of fish. In other words, the free operation of the market has not produced a desirable outcome.

A negative externality exists when participating in the market results in unwanted side effects. The costs associated with these side effects are ultimately placed on people who were not involved in the original transaction. This might sound unfair, but it happens to you every day.

For example, how do you get to school? Most people travel in either a car or a bus. Some walk, while some willing to ride their bicycles. There are also some who use a train or tram. When travelling to and from school, many of you are contributing to the most obvious form of market failure – pollution. Pollution exists in the exhaust fumes of cars. It is also created when we generate the electricity necessary to power our trams and trains. This pollution causes the death of many smaller animals, and it results in a smell, discoloration of buildings and a reduction of property values. Noise is another form of pollution; almost all forms of transport result in some form of noise pollution.

This situation arises because the cost to society is higher than the cost to the individual. If I do not have to pay for the pollution that I cause, then I will continue to pollute as long as my own standard of living is increasing.

You would be aware that the global problem of pollution has now grown to such a state that the very future of our planet is in jeopardy. Carbon emissions into the atmosphere have contributed to the warming of our planet. This is resulting in the melting of polar icecaps, and the subsequent rising of sea levels. Low lying countries like Bangladesh are in danger of being completed flooded, which will result in millions of people becoming refugees and looking for new homes in other countries. Species will become extinct, and the shape of continents will change. Weather patterns are shifting. All of these things have resulted from the mis-management of the economy.

And this is why it is so important that economists take the time to contribute to the solution.

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