Economic Externalities And Market Failure Essay

Economic Externalities And Market Failure - Essay Example It can then, in turn, have either a positive or a negative effect on a third party individual who is not directly involved with the buyer or the seller of the transaction at hand.These costs (or benefits) are not included in the cost curve faced by the decision makers. For example, if I plant trees around my neighborhood, not only will I enjoy the benefits of having a street that is cooler and has more shade, but so will my neighbors, even though they did not have any part whatsoever to play in planting the trees. This is an instance of a positive externality. There are several instances that provide absolute evidence that the market economy is plowed with enough imperfections and that it is unable to achieve economic efficiency. Economic efficiency is both productive and allocative efficiency. Productive efficiency is achieved when goods are made with the least possible amount of scarce resources, in other words, goods are made at the lowest possible cost. Allocative efficiency is a chieved when the right amount of scarce resources are allocated towards the production of the right kind of products., i.e., when a combination of goods that leads to the maximum satisfaction of unlimited wants is produced, allocative efficiency is achieved. Therefore, the market fails to choose the right goods and services and is unable to produce them well enough. Market failure is a concept pertained to economic theory, whereby the allocation of goods and services by a free market is not very efficient.