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Occupational Health and Safety, Canadian Edition

15th Edition
by David L. Goetsch, University of West Florida and Oskaloosa-Walton Eugene Ozon, Algonquin College
1035 Solutions 49 Chapters 1453 Studied ISBN: 0133450244 Computer Science 5 (1)

Chapters 4: DQ 1

DISCUSSION QUESTIONS

1. Explain the two causes of market failures. Given their definitions, could a market be affected by both types of market failures simultaneously?


Step-By-Step Solution

DISCUSSION QUESTIONS

1. Explain the two causes of market failures. Given their definitions, could a market be affected by both types of market failures simultaneously?

Answer: A public good is one where consumption in non-rival and non-excludable. Private goods are not profitable because of the free rider problem. If we want to set off fireworks and charge for the event, we probably wouldn't generate much revenue. We can't keep people from watching the fireworks outside the event (non-excludability) and the fireworks display can be watched by all (non-rival: If one person watches the fireworks display this does not reduce or eliminate the someone else's ability to see the same fireworks display). This is the first type of market failure.

The second potential market failure is the presence of an externality. Externalities occur when the costs or benefits accrue to someone other than the buyer or seller (third parties). For example, an individual may fully internalize the cost of smoking a cigarette (price, health, etc...), but he or she does not internalize the negative health effects that the cigarette may have on others (a third party). This will result in overconsumption (and production).

Answer 1: Yes, it is possible for both to occur if an individual values the good, such as fireworks, even if the free-rider problem is present. For example, I would like to set off a fireworks display and charge for the event so it can be larger than the display I would pay for myself. However, since everyone free-rides on my display I only set off a small one (the public good is underprovided). Now if my fireworks display causes pollution (noise and smoke) or potential fire damage a negative externality may be present.

Answer 2: No, because if the free-rider problem is present firms will not produce any of the good. Since no goods are produced or consumed there cannot be an externality.


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