Question

What is meant by a market failure? What is an externality? What is the role of government in addressing a positive or negative externality? Please explain.

Answer 1

Market failure

market failure is aindust defined as a situation in which the allocation of goods and services by a free market is not efficient.
It is a situation where, in any market, the quantity of a product demanded by consumers does not match with the quantity of good supplied by suppliers. This is a direct result of a lack of certain economically ideal factors, which prevents equilibrium.

externality is defined as a cost or a benefit that arises from production and falls on someone other than the producer, or a cost or benefit that arises from consumption and falls on someone other than consumer.

Definition. positive externality

It is a spillover benefit; the Marginal Social Benefit (MSB) > Marginal Private Benefit (MPB); underallocating resource

The government role under positive externality it that it will subsidize consumers, producers, or provide goods themselves

Definition Negative externality

It is a spillover cost; Marginal Social Cost (MSC) > Marginal Private Cost (MPC

the government role in negative externalities

Government can regulate industry

Government should tax goods with negative externalities and subsidize goods with positive externalities.