Market Failure Paper

Market Failure Paper

Introduction

This paper will discuss an article on the topic of market failure. The topic I have chosen for this assignment is, “The Externalities of New Energy Industry and Correction Suggestions”, written by Bin Xia & Ting Gao. This article discusses the recent development that is taking place in energy sector, is mainly focusing the structure of production such that to meet demand and supply of the energy producing in relative low prices. It also discusses that

In the new energy industry development process existing obvious external effectiveness, make the competition market resources allocation efficiency losses, resulting in deviating from the Pareto optimal state that cause "market failure" (Bin Xia et al, 2011). General principles taken into consideration it can be said that externalities create elimination of misconduct of resource allocation. This article from an economic point of view suggest that the reduction of the cost of production and the enhanced efficiency output could play an important in making resource allocation efficient, by implementation government intervention to make must changes to improve the resource allocation to make sure new energy industries development.

Discussion

When economists talk about the functioning of the market, keep in mind how well the market is doing its job to ensure fair trade organizations. Ideally the market should make it possible to any exchange that is mutually beneficial to both parties. Market failure is the inability to market to ensure the efficient allocation of scarce resources.

External effects Causing Market Failure

One type of market failure is the inability of the market to ensure the transfer of information on the rarity in the form of prices. In order for markets to function efficiently, the price should reflect the opportunity cost of production of certain goods and services.  However, there are situations in which the actions of producers (and consumers) have an impact on third parties, that is, people who are not in the transaction or the sellers or buyers. This effect is aimed at third parties and is not reflected in prices, known as external effects. A classic example of externality is pollution (Aidt, 2003).

In the article it was seen that there was an affect of external factors on the cost of production of energy.  As market prices are reflected internal costs, i.e. equipment costs for fuel, labor, because they are covered by the factory. These costs are reflected in market transactions, as the plant to continue operations should at least cover ...