Market failure occurs where the price mechanism fails to allocate scarce resources efficiently (allocatively efficiently) or when the operation of market forces leads to a net social welfare loss.
It is not possible to prevent people who have not paid for the good to benefit from it.
Making the customer aware of the harmful effects of the product will make them want to consume less.
This is particularly relevant for Information Asymmetry.
By restricting where the good is available to use, or restricting the advertising for the good, demand for the product will shift left and fewer people will use the good.
Government sets a cap on level of pollution allowed.
Firms have permits to allow them to pollute.
They can either use the permits or reduce their emissions and sell them to other firms.
This creates a monetary incentive for firms to reduce their pollution.
Reducing the number or permits over time increases the price of pollution- further incentivising cuts.
Social . . . Social
-They take time to produce
-They may only be available in certain countries
-Creates a market incentive for innovation to cut carbon.
-Efficient because it is cost effective: carbon emissions can be cut by the firms who have the cheapest costs.
Occurs when producing or consuming a good causes an impact on third parties not directly related to the transaction.
-Maximum prices ensure that the good is affordable, even to those on low incomes.
-It will increase access to important events, such as the London Olympics.
-In the case of rental housing, it ensures that the tenants have some balance of power shifted to them in what would otherwise be a lopsided market.
