The Occurrence of Market Failure takes Place Whenever the Free-Market Equilibrium: Economics Homework, BC, Singapore

Answer 1:
The occurrence of market failure takes place whenever the free-market equilibrium level of quantity is higher or lower in comparison with the socially optimal level of the output. The free market would produce either too much of a good or too little (Horne, 2019).
A negative externality is the cost burden borne by a third party which may involve any organization, individual, or resource as an outcome of economic activity where the producer is the first party, and the consumer is the second party associated with the economic activity.
In other words, when the commodity produced generates spillover costs for the whole society that are not borne by the producer of the associated commodity.
Negative externality caused due to emissions causing pollution by the energy industry that deals with fossil fuel or coal-generated electricity along with the impacts on society and the cause of market failure is discussed (Heutel, 2019). The market failure due to production and consumption of energy is given as Have you finished this sentence? file’s Negative Externality and market failure due to the production of energy in fossil rues’ is explained by Figure A.

The above diagram depicts the demand curve (D) and supply curve(S) observed in terms of the Marginal Private Cost (MPC) or Marginal cost (MC) Marginal Private Cost (MPC) and the Marginal Benefit (MB) respectively. The MPC is the cost faced by the actual producers of fossil fuel.

When there is a negative externality caused by the extraction of fossil fuels by large companies leads to polluting the air and water harming workers and local communities. Transportation of fuels from mining sites also contributes to air pollution and this is the external cost of production (Agaton, 2017).

When such fuels are burnt, there is an emission of toxins that contribute to global warming through the creation of pollution as a by-product that would create a cost causing health concerns in the production site and environment.

If the Social Cost(SC) of production is greater than the private cost (PC) then Negative Externality exists as shown by the supply curve S, depicting the MSC which is higher than the MPC. This implies that there are External Costs (EC) not borne by the producers.

energy but by the whole society. The MB represents the demand curve, 0 of the consumers of fuel as a source of energy. Higher levels of consumption would mean lower additional net benefits for society.

When MB intersects the MSC curve of production results in lower demand and supply of fossil fuel and the quantity, a that stands for the socially optimal quantity that corresponds to the MB and MSC of the consumers in the market. If the firms bear the EC generated by the pollution and high healthcare cost of workers then the actual output level in the market would be lower than the equilibrium output level

(a). As firms do not face such costs, the PC would be lower than expected. Therefore, Qe > Q. The equilibrium price of energy, P. will be lower than the socially optimal Price, P, which occurs when the firms incur the EC instead of transferring to the society (Ricke et al. 2018). There would exist a quantity that is greater than the socially optimal level of quantity.

There would be an over-production of fossil fuels resulting from the EC not being borne by the producer and Q. <Q. As a result, the optimal quantity, Q. is produced and a higher price of Pe implying a lesser consumer surplus in the energy market. Since the product is harmful which creates pollution and higher health care cost in the production of the triangular area PDE. represents the consumer surplus that is beneficial for society meaning that the people would be consuming fewer fossil fuels as a source of energy.

In addition to the existence of negative externality, there would be the creation of deadweight loss or welfare loss as shown in Diagram (a) depicted by the area E, EA representing the EC borne by the society as an outcome of overproduction of fuel leveled at That implies that if the decrease in the quantity supplied to Q the loss of would not occur and the deadweight loss would be eliminated which would imply that the society would be better off consuming a lesser quantity of fuel. The PC of fossil fuel extraction would be lower if all external costs are

Figure B depicts that under circumstances when benefits to consumers of fuel are greater than social benefits of consumption there would be a spillover cost resulting from the consumption by the society raising environmental concerns. Q and P. represent the equilibrium levels of output and price associated with fuel consumption by consumers.

Demand curve D1 represents Marginal Social Benefit (MSS). At the equilibrium output level, Q, MSB is less than Marginal Social Cost (MSC) and Marginal Private Benefit (MPB) which implicating the benefits from society are less at Qthan the private consumers consuming fuel to meet daily needs that cause emissions through automobiles and generators that raise environmental concerns.

The MSB < MR at P. = MPB (Bonnet et of. 2020). The private consumers of fuel are benefiting more from society. There are negative benefits or costs to society shown by the distance between MSB and MPB that represents the EC for consuming fossil fuels. The socially optimal level of consumption can be attained at Q.

at the intersection point of MSB and MSC curves implying no external costs on the society without government intervention more fuel consumption would increase pollution and demanding government intervention as the society would have been better off at Q(Du et of. 2018).

part of the government for the reduction of the size of the loss of welfare. There is a particular type of intervention that increases the production cost faced by the firm and that is an excise tax. Consider the effect of tax on the production of energy.

A tax increases the MPC of the production, in situations when the government were to impose a per unit tax on the production of the product bring about a rise in MPC of production and move the MPC curve towards the MSC curve provided the amount of tax should be as closer to the amount of EC faced by the society.

The size of the per-unit externality gets equalized with optimal tax. MPC curve shifts upwards would under the influence of the tax resulting in a reduction of demand and supply of a quantity of the product and eliminate the negative externality as an outcome of the production of the energy.

The expected result is that an externality being equalized with the amount of tax will bring about an upward shift in the MPC till the attainment of equality with marginal social cost(MSC) so the new MPC with the inclusion of tax (if the tax imposed is of the appropriate percentage) will equalize with the MSC (Bastianin and Florio, 2018).

The high cost of production of firms will result in a decline in the quantity of output that contributes to being produced to the socially optimal level of output (Klein, 2019). In the market for fossil fuel or coal-generated electricity, there is an area of consumer surplus depicted by the triangular area P.13E, and the firms that would be paying the tax would have less producer surplus followed by the generation of tax revenue on the part of the government.

The tax revenue generated would be given by the rectangular area DAEP. which is the product of per unit tax and Q. The deadweight loss of tax is given by area AE.E. but under this case after the imposition of tax as opposed to reducing the market welfare the production of the product generates negative externality and increases the welfare in the market depicted by area AEA.
The government intervention through the imposition of tax on coal-generated electricity and extraction of fossil fuel increases the PC of the producers leading to a higher equilibrium.