ECO440H5 Chapter Notes -Government Failure, Market Failure, Externality
Document Summary
It is important to remember that divergences from perfect markets are not necessarily bad things in themselves positive externality is a good example (coming up below) Once a divergence is identified, the challenge is to find a strategy which responds to the resulting inefficieny and will perform better than leaving the market to its own devices. Government intervention is recommended only if likely government failure to intervene perfectly is less than the market failure under assessment. Externality has been defined as a side effect of either consumption or production which is not traded on the market or taken into account in setting a price. In other words, consumers and producers either are not affected or do not bear the full brunt of the effects their consumption or production. The standard example of negative externality is pollution, usually (but not always) a side effect of production. A producer of clothing may release dye stuffs into the local river.
