Table of Contents
2. Merit and De merit goods
3. Public Goods
4. Monopoly Power
6. Factor Immobility7. Agriculture (Economicshelp). Human health and ecosystem is degrading due to many water and air pollutants, yet which are not included in the costs of production or at consumer level. These costs are called as externalities. This represents a market failure. Atmosphere is a public good but people do not care about it. Anthropogenic activities are continuously adding huge quantities of carbon dioxide and greenhouse gases in the atmosphere resulting in the earth's pollution. The following graph illustrates the rise in atmospheric carbon dioxide from 1744 to 2005 (Pidwirny 2006).
(Source: Pidwirny 2006) Harmful substances such as sulphur dioxide, carbon monoxide, and oxide of nitrogen, lead compounds and chlorofluorocarbons are the fastest growing sources of air pollution by the activities of man. In addition Industrial wastes, leaking septic tanks and landfills, and pesticides, Deforestation, and other hazardous compounds released by motor vehicles and industrial plants contributes to air pollution. Pollution is the classic example of an economic externality. Due to air pollution we are facing the ozone layer depletion. The climate change is a complex problem as there is change in climate all over the world and the existence of spill over costs is resulting in air pollution, noise pollution, and congestion. Pollution of one country is affecting other countries too. Another major cause of market failure is an incomplete distribution of property rights that is open access of resources to all individuals. Economic solutions to market failure: There are several economic solutions available to overcome problems of market failure. Some are described below: Environmental taxation: One of the most common strategies used to control environmental pollution is the so-called environmental taxation. To reduce the production or consumption of environmentally hazardous products, a tax is placed on the use of such products. The principle goal of environmental taxes is that it maintains the stability of the revenue and do not causes negative impact on competitiveness and economic growth.
It works best where number of tax prayer is relatively limited and easily identifiable (Environmental Taxes 1999, pp 8-9). Examples include petrol tax, landfill tax, vehicle excise duty, new carbon tax. and tax on plastic bags. Advantages of environmental taxation are many folds: They can promote development of new technologies. They provide motivation for behavior that protects the environment. Emission of carbon dioxide can be reduced with the help of carbon tax and thereby slow climate change. They enable environmental goals to be achieved at the lowest cost. The main purpose of environmental taxation is to increase the firm's private marginal costs (PMC) to social marginal cost curve (SMC), in order to increase the output (Jim et al.). (Source: Jim et al). Government Regulation: To achieve economy efficiency, government regulations are needed. Government can use taxes, public goods to deal with spillover benefits. Government regulation has played an important role in correcting the distortions created by market failure. These are as follows: To overcome market failure, government can reduce pollution by placing tax. Taxation of monopoly profits, for firms to price discriminate, charging different consumer's different prices according to their willingness to pay .Education, campaigns and advertisements solve the problem of imperfect information which makes consumers unaware of the positive externalities and benefits. Subsidies and Government provision: If the spillover benefit's are very large than government has three options to correct it to some extent. First include subsidies to buyers, second, subsidies to consumers and third government may decide to provide the products as public goods. (McConnell, et al., 2004, p.320). Trading in marketable permits: Another mechanism to overcome climate change due to market failure is trade and marketable permits in a cost effective manner. This is also known as cap and trade mechanism. The aim of carbon and trade mechanism on major energy consuming and producing manufacturers is to reduce current greenhouse gases emission. In trade and cap mechanism, industries which are responsible for emission of GHG are usually focused (Labatt & White 2007, pp.32, 35) In this natural resources are used within the defined global limits set by the government and firms are allowed to distribute the emission level independent of government intervention. It enables economic growth without compromising environmental quality. This approach has been widely applied to air pollution such as carbon dioxide, sulphur dioxide, methane, and to natural resources. The goal of the cap is to prevent increases in greenhouse gas emission each year (Surabaya 2007). The economic benefit of this mechanism is that it is cost effective and technology standards are avoided so that firms are free to apply strategies they feel are most economic. (Carraro 2003, p.49). Carbon credit market is the practical approach of this method. The purpose of carbon credit is to reduce carbon emissions in the atmosphere. A carbon credit could be sold by person to carbon emitters who could conveniently reduce carbon emissions. Carbon credit accounting system must be accurate, comparable and verifiable. International use of carbon credit mechanism helps to meet the climate change. Diagram of the cap and share model (from www.CapandShare.org). Most efficient approach: Emission trading is the most efficient approach for controlling distortions created by the market failure as compared to other solutions because it is cost effective and minimize the involvement of civil servant in its operation. It is clear that command and control instruments mentioned above are least cost-efficient compare to trade and marketable permit mechanism as compliance costs are usually high. It has been estimated that the cost of emission trading is between 2.9 billion euros and 3.7 billion euros compare to 6.8 billion euros compliance costs annually (Surabaya 2007). However, command and control mechanism may create greater benefits for technology research. I think that emission trading mechanism is the most efficient environmental regulatory approach as it creates a lot of job opportunity. Cap and trade method provides more environmental assurance than environmental taxation because it does not set a quantitative limit on greenhouse gases emission (Cap and Trade 2008). Conclusion: It is concluded that climate change is continuously increasing due to greatest market failure. Market failure has the major impact on Environmental realms. Especially micro economists are concerned with market failure and possible means to correct it. Such analyses are important for public policy decisions. There are often many solutions to overcome market failure such as Government regulation, environmental taxation and Trading emission, but trading emission is consider as the most efficient approach for correcting the distortion created by market failure.