Negative Production Externalities (Chain of Analysis)
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Last updated 21 Mar 2021
This is a short revision video revising how negative production externalities can cause market failure.
Explain how negative externalities from production can cause market failure
Externalities are spill-over effects from production and consumption for which no compensation is paid. Externalities lie outside the initial market transaction/price.
Examples of negative production externalities include the external costs of pesticides used in intensive farming and damage to ocean beds from industrial fishing.
The over-use of pesticides will pollute rivers and streams which then causes harm to those who use them. Marginal social cost therefore exceeds marginal private cost (MSC>MPC).
If market output supplied is higher than the social optimum then there is market failure and a deadweight loss of social welfare. Some intervention might be needed.