write externality and market failure. and list some references.
Externality and market failure are two interrelated concepts in the field of economics. They both arise when the normal operations of a market do not lead to efficient outcomes, resulting in a decrease in societal welfare.
Externality refers to the positive or negative impact of a transaction or a decision on third parties who are not directly involved in the said transaction or decision. It arises when the private costs (or benefits) experienced by the individuals or firms directly involved in a transaction do not fully reflect the true social costs (or benefits) of that transaction. This can lead to the overproduction (in the case of negative externalities) or underproduction (in the case of positive externalities) of certain goods or services, as compared to the socially optimal level.
Market failure, on the other hand, occurs when there is a misallocation of resources in a market, leading to inefficiency and a reduction in overall societal welfare. It can be caused by a variety of factors, including externalities, public goods, market power (monopolies), and asymmetric information.
Externalities are one of the key causes of market failure. They can lead to market failure when producers or consumers do not bear the full social cost or benefit of their actions. As a result, the market outcomes do not maximize societal welfare, and hence, the free-market mechanism fails to allocate resources optimally.
There are numerous examples of externalities and market failure in real-life situations, such as air and water pollution, traffic congestion, overfishing and deforestation. Governments and policymakers often intervene in markets in order to address these externalities and correct market failures, through various strategies such as imposing taxes, subsidies, or regulations.
Some references for further reading on externalities and market failure include:
1. Mankiw, N. G. (2018). Principles of economics. Cengage Learning.
2. Frank, R. H., Bernanke, B. S., Landon-Lane, J., & Antonovics, K. (2019). Microeconomics and Behavior. McGraw-Hill/Irwin.
3. Tietenberg, T., & Lewis, L. (2016). Environmental and natural resource economics. Routledge.
4. Stiglitz, J. E. (2000). Economics of the public sector. WW Norton & Company.
5. Acemoglu, D., Laibson, D., & List, J. A. (2019). Essentials of economics. Pearson.