Hello! In my last blog post we talked about supply, demand, elasticity and the importance of markets economy. However, some markets do end up being imperfect and inefficient. Today, let's tackle the topic of Market Failure. In economics, Market failure, as the name suggests, happens when the market fails because it is inefficient - that is, not operating at its maximum and optimal capabilities. There are many possible reasons why a market would fail, one of which is the existence of externalities. The global issue I’d like to use as an example is the topic of overpopulation and how market failure arises from that and the free rider problem. To understand the free rider problem, we have to know about externalities first. Externalities are the indirect effects of a particular activity (either production or consumption of a good or service) that influence a third party. This third party is not paid by those who engage in the activity nor is paying them. Externalities can thus be classified as either positive or negative. An externality is positive when the third party benefits from this action. An example of a positive externality is education. Education increases the amount of experienced and intellectual citizens which may lead to positive changes in society like a low unemployment rate. On the other hand, an externality is negative when the third party suffers/harmed as an indirect effect of an action. The best examples for a negative externality are pollution and global warming - caused by the burning of fossil fuels in the factory production of various goods. This activity then results indirectly in carbon emission in the atmosphere, which then globally harms humanity. The important thing to note about externalities is despite them being indirect/unintentional, externalities are still reflected in the price of an object. If a product has a negative externality, it is very likely that the product’s price would increase as a result while products/services with positive externalities tend to be encouraged via subsidies and such. To better understand externalities, let’s talk about the kinds of goods. These are public goods, private goods, club goods and common goods. There are two questions to ask when classifying these, “Is the good a rival in consumption?” and “Is the good excludable”. A good is excludable if and only if the people who have actually paid for the good are the ones who use it. A good is a rival in consumption if the consumption of that particular good is contested - meaning the more one good is used, the less other consumers can use it as well. Let’s talk about each one in depth:
These kinds of goods relates to externalities because in essence, these kinds of goods are classified also based on their externality on people. However, let’s focus on public goods as it directly relates to the free rider problem.
The free rider problem arises when people receive positive externalities from a particular good but don’t actually pay or contribute to the creation/production of these free goods, in other words, these “free riders” get more than what they deserve. This is a problem because these public goods will run out if the producer does not get compensated for their work. That and the people involved don’t actually contribute to the efficiency, leading it to become inefficient. Thus market failure occurs. A great example of this is when a government actually does its’ job and use taxes to provide new infrastructure BUT people stop paying taxes, meaning that these people don’t actually contribute anything to these new infrastructures yet use them anyway. The government is then left with no funds to continue creating more public goods. Personally, this means that people should stop complaining about these public goods or blaming the government, if they don’t actually pay taxes and try to help. Now let’s link it to the global problem of overpopulation. As mankind progresses through history, more people will undoubtedly be born. However in recent times, humans have been multiplying at a higher exponential rate, thus leading to overpopulation. Now the problem with overpopulation is that it leads to a concept called “tragedy of the commons” wherein people independently without a care for other people; in other words, they deplete these public goods selfishly. Overpopulation then leads to the free rider problem because more and more people actually take more than what they deserve and cause more damage, in light of their self-fueled desires. More people will then take land (sometimes even destroy the land) for themselves, leaving less or even none for the rest of us. Hopefully, this economics blog helped you be more aware of the externalities each of our actions bring and brought to light the problem of overpopulation. References & Sources: https://www.boundless.com/economics/textbooks/boundless-economics-textbook/market-failure-public-goods-and-common-resources-8/public-goods-61/defining-a-good-229-12320/
0 Comments
|
AuthorHi, I'm Gabriel, a high school student at Xavier School writing this blog about economics aimed towards teenagers. Have fun! Archives
October 2015
Categories |