write externality and market failure. and list some references.
Externalities refer to the effects of economic activities on parties outside the market transaction. It is a situation in which the production or consumption of a good or service affects the welfare of individuals or firms that are not involved in the transaction. Externalities can be positive, such as the benefits of education, or negative, such as pollution. The failure of markets to account for externalities leads to market failure.
Market failure refers to the situation in which the market mechanism fails to allocate resources efficiently. It can occur due to various reasons, such as externalities, public goods, asymmetric information, and market power. Market failure results in a suboptimal allocation of resources, which leads to welfare losses.
Some references on externality and market failure include:
Baumol, W. J., & Oates, W. E. (1988). The theory of environmental policy. Cambridge University Press.
Stiglitz, J. E., & Walsh, C. E. (2006). Economics (Vol. 6). New York: Norton.
Varian, H. R. (2014). Intermediate microeconomics: a modern approach (9th ed.). W. W. Norton & Company.
Pigou, A. C. (1920). The economics of welfare. Macmillan.
Coase, R. H. (1960). The problem of social cost. Journal of Law and Economics, 3, 1-44.