Sponsored Ads

Search JC Economics Essays

Custom Search

(a) Explain why pollution and congestion caused by cars may cause market failure [10]


(a) Explain why pollution and congestion caused by cars may cause market failure. [10]

Pollution and congestion may cause market failure because they are forms of negative externalities, which distort the socially optimal workings of the free market. Externalities are third party spillover effects, and can be categorized as positive and negative. Whether positive or negative, externalities cause market failure as they distort the socially optimum output to society because of a discrepancy between the social costs and benefits and private costs and benefits. Market failure can be defined as the failure of free markets to allocate resources in a socially efficient manner. This paper discusses why negative externalities cause market failure in the context of congestion and pollution, and demonstrates there is a deadweight loss to society when drivers consider only private costs and benefits and not social costs and benefits.

A negative externality occurs when motorists fail to consider the social costs of their journeys. The individual motorist only considers his private costs and benefits, and hence only his private marginal cost matters to him. For instance, fuel costs are part of his private costs and he factors them into his calculations. However, by driving on the roads, a motorist inflicts external costs on others, namely congestion and pollution. Congestion is a third party external cost because other drivers have their speeds reduced as a result and pollution is a third party external cost because pedestrians and motorcyclists suffer from irritation and perhaps even health problems. Hence, the motorist who considers only his private costs and benefits fails to take into account the external costs that he imposes on others.

These results can be seen in the following diagram…


Insert diagram


The diagram demonstrates that the socially optimum level of car journeys should be at q2 at a price of p2, yet the private market, which does not take externalities into account, produces q1 car trips at a cheaper price of p1. This means that the negative externality results in more car trips being taken at a lower price than what is socially efficient. Since the number of car journeys is underpriced and overprovided there results a deadweight loss to society. The socially optimum level should be at p2 and q2, not p1 and q1.

Therefore, pollution and congestion caused by cars are likely to cause market failure.

In conclusion, there are many types of market failure: imperfect markets, the failure of Adam Smith’s free market to produce public goods, and above all externalities. In the case of cars, causing congestion and pollution, the market failure in question is externalities – and in particular, negative externalities, where third parties suffer negative spillover effects such as congestion and pollution when others drive.


JC ECONOMICS ESSAYS Economics Tutor's Comments: This is a very well-written Economics answer. What can you learn from the way this economics essay is written? Why is it good? How would you have addressed the question? And what other comments would you have about it? Do think about how to write a proper economics essay every time you read one. This economics essay was professionally written.

Sponsored Ads

Please do NOT Plagiarise or Copy Economics Essays

It is one thing to learn how to write good economics essays from sample or model economics essays, but another thing if you plagiarise or copy. Do not copy economics essays.

First, if you are handing in an assignment online, there are checkers online which track sources (such as turnitin). Please craft assignments yourself. Second, if you are handing in a handwritten essay, if you copy, you will not learn and will thus not benefit, nor earn good grades when the real economics examination rolls round. Third, you can always write better essays given time and improvement. Fourth, copying is illegal under most conditions. Do not copy economics essays.

This is an economics site for you to learn how to write good economics essays by reading a range of useful articles on writing, study essay responses and contributions and sample/ model economics essays from students, teachers, and editors. We hope you can learn useful and relevant writing skills in the field of economics from our economics site. Thank you for reading and cheers!