In an area an industry is polluting and the public residing nearby are suffering badly. The industry owner is not paying any money to compensate the loss. If ‘discrepancy between social cost and private cost’ is an indicator of market failure, can we suppose the occurrence of ‘market failure’ in this example?
My economics are rusty, so not familiar with some terms. Every country has its own rules, and responsible agencies and justice system, but many to most are based on common law principles. It is not unusual that a polluter would not voluntarily compensate or institute operation cleanup measures. The industry is not feeling any legal or compensory costs if the public does not speak up or take appropriate legal action. There was a movie made in USA about Erin Broncovich (probably misspelled), and she took on industrial mishaps related to water quality and health effects by doing interviews with effected individuals and families, collected associated data, and coordinated legal actions against powerful industry. I don’t remember all the specifics, but sometimes poor or uninformed people need an advocate. I am not certain what constitutes market failure pertaining to your question, but it seems the industry is still in business, and if it goes bankrupt, it may leave a mess for public, country or society to endure or cleanup. I recommend performance bonding for activities and industries sufficient to support suitable damages and cleanup costs for non, negligent or poor performance, so the public does not have to bear their burden.
There are various businesses that will fold-up and/or relocate in an environmentally polluted area. others will not consider starting a business is such locations there affecting the economic values of the area.
The Polluter Pays Principle (PPP) should apply here which mandates the polluter of the environment to pay compensation to affected people and also pay for the remediation of the environment. It is part of the United Nations Conference on Environment and Development declaration in Rio de Janeiro Brazil in June 1992. Look for section 16 Rio Declaration.
I love William F. Hansen submission in explaining market failure and linking externalities as an example of market failure as well as a case example linking the scenario.
Market failure occurs when the market does not allocate resources on its own efficiently in a way that balances social costs and benefits. Ideally, environmental economics considers social costs in production which are all cost inherent in production of a commodity as well as other spill over effects it will have on the environment likewise private costs which are costs for production of commodity per se. In an ideal market, social costs are meant to offset all environmental concern and issues because it cures pollution arising from production due to internalization of cost other than externalization like we have in private costs scenario. So judging your scenario, market failure occurs in markets where social costs are not holistically implemented in an industry and there are pollution and harm on neighborhoods. Reasons are not far fetched, some capitalist will prefer to use private cost for more profit and allow the environment to degenerate. I hope this explanation helps Karuna Phukan
If you need further clarification on this, let me know. Thanks
- Badges
- Science topic
- Similar topics
- Filing