Definition of Financial Terms

Speeches Essay on Markets Failures and Expectations

Markets Failures and Expectations

Situation 1

The situation here is that of a private market activity, which has the potential to cause an externality or a spillover. In this particular case, there is a negative externality, namely the water pollution problem thatoccurs, and the producer cannot be charged every cost (Cohen, & Winn, 2007). Since the external costs cannot enter each calculation made by Firm A, Firm A produces an excess of the commodity than   what would seem to be socially beneficial.



Social cost

12                                                              Supply (the private cost)





60           80  Quantity of cement

Given that the cost of pollution linked to the manufacture of cement is constant at $5 per ton, the private cost for producing the cement would be affected if the pollution cost would be included. Private cost can be shifted upwards by $5. The addition of the cost of pollution in producing the cement to private cost can generate a social cost curve for such a production. This problem can be rectified through the endorsement of a pollution compensation tax that equals $5 per cement ton.

Situation 2

This situation is a depiction of the type of market failure referred to as natural monopoly. In this scenario, countries that offer free university tuition have more educated persons who become productive to the state in the later years while  the nations which lack such programs may not enjoy similar benefits. This remains the case even if the latter countries introduce such programs because they cannot match the economy of scale that the countries that had this program before enjoys. Such countries  can thus create an imperfect market that fails to match the marginal social benefit (MSB) to the marginal social cost (MSC)(Asafu-Adjaye, 2005).



p1                         A         S=MSC


MSC=MSB                        B                            C




0                     Q1    MR           Q*                                                  Quantity

The point at which the country capitalizes on the number of its residents who become educated, that is where MC=MR, Q1 becomes produced at the P1 price, hence the socially efficient output level Q* cannot be realized. In this instance, no maximization of the surplus in the community occurs. This happens as a result of the failure to produce units Q1-Q*  although MSB>MSC. The government subsidy is therefore raised to ensure the sustenance of the program.

Situation 3

This scenario depicts a case that falls under the market failure known as public good, in which the consumption of the product does not reduce its availability for the others. However, just as in Bob’s case there is a fundamental problem with either public or private provision centers in connection to the revelation of preferences for the public goods. For example, Bob’s neighbors who gain from the paved road as a public good decline to contribute the amount which reflects their own valuations and decide to free ride on the payments of Bob. The free-riding problem encourages the limitations of provision of the public service (Cohen, & Winn, 2007). This however, seems not to resolve the difficulty of determining the aggregate valuation of this good by the public and whether or not it needs to be supplied. If the residents could be excluded from using this road, the free rider and revelation problem could have been resolved, at least within principle (Cohen, & Winn, 2007).

Situation 4

In this situation, the national defense is a public good (Cobin, 2009); and the idea of people voluntarily paying for their fair share of the national defense related costs cannot work. This policy can only be transformed into a good policy if the idea of paying voluntarily is excluded from the equation. National defense is not an excludable good because it covers the nation in its entirety hence citizens cannot be excluded from its consumption. Therefore, if its payment is made voluntary, the free-rider problem will definitely arise. The government needs to therefore, utilize the money paid in by the taxpayers to fund the national defense (Cohen, & Winn, 2007). This will make sure that the costs are spread across a great number of persons who may not be prepared under normal circumstances to pay individually (Cobin, 2009).




Asafu-Adjaye, J. (2005). Environmental economics for non-economists: Techniques and policies for sustainable development. New Jersey, NJ [u.a.: World Scientific.

Cobin, J. M. (2009).A primer on modern themes in free market economics and policy. Boca Raton: Universal-Publishers.

Cohen, B., & Winn, M. I. (2007).Market imperfections, opportunity and sustainable entrepreneurship.Journal of Business Venturing, 22(1), 29-49.


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