Introduction
Ideally, if the government left the markets to themselves, there should be a form of market efficiency, only that there is not. Government interventions and rules affect supply and demand of products, so when there are subsidies and quotas, the equilibrium price goes down or up, affecting the quantity of products in the market. On a free market situation, externalities and public goods disrupt the market efficiency, causing market failures. Externalities can be defined as those costs or benefits that are not entirely borne by the market (Library Economics Liberty, 2002). Public goods are services and goods designed for public utility like schools and national defense.
Effect on optimal resource allocation
Public goods do not correspond with changes in the number of consumers or buyers. The price of a public good does not respond to a marginal change in the rate of demand, making it very difficult to attain optimal levels. For instance, increase in the population, marginally, does not affect the national budget on security and defense. An additional consumer can enjoy a public good without having to change the amount of services or goods supplied. In the education system, the capacity of the facilities can be scalable with a margin 30%. That means that the current schools will still support the admission of an extra three pupils in every ten who are in school already.
Externalities are costs and benefits that different players in the market bear or enjoy without paying for them. If a manufacturing company discharges waste into a river whose water is consumed by people and animals, the health of the consumers will be deteriorated. That means that the people will incur costs in treating the sick and crop productivity will go down, due to the discharge of the waste into the river. In this case, the people are paying for costs that should be borne by the manufacturing company and that cost is not reflected in the market dynamics. Flipping the coin, a contractor for a mining company can construct a road in a remote area to ensure that there is easy movement to the mining areas and back. The people of that area will use the road, and enjoy the benefits of having a mining contractor in the region, even though they have not paid for the construction of the road.
The above scenarios show how public goods and externalities play out. Going by the scenarios, the optimal resource in a market cannot be achieved even if the government left the markets to themselves. The hidden costs and benefits keep coming up, cyclically, and the market would need extended periods of stability to achieve efficiency.
Policymakers should keep a very keen interest in the impacts of the activities of corporate and organizations. Environmental bodies should come up with guidelines on pollution, and the costs to charge on companies that exceed certain levels of emissions. Special taxes can also be levied on the goods and services, or on corporate profits, so as to re-invest in taking care of the externalities (Skok, 1987, p. 05). For services that benefit the common population without people paying for them, like a new road by a contractor, the government can offer tax holidays or incentives to the contractor so as to compensate them for the monies spent in building these public utility infrastructures (Negishi, 1974, p. 265)
Conclusion
Public goods and externalities are some examples of market failures that do not depend on the government. The market forces do not reflect all these costs and benefits, and the fact that they keep emerging makes it harder for the market to reflect the allocation of resources. The general law of supply and demand postulates that increased demand should push the price upwards, but in public goods, there are free riders who do not pay for the resource.
References
Library Economics Liberty. (2002, November 1). Market Failures, Public Goods, and Externalities, College Economics Topics | Library of Economics and Liberty. Retrieved from http://www.econlib.org/library/Topics/College/marketfailures.html
Negishi, T. (1974). STABILITY OF MARKETS WITH PUBLIC GOODS. Trade, Stability, and Macroeconomics, 259-268. doi:10.1016/b978-0-12-356750-5.50016-5
Skok, C. D. (1987). Key Theological Positions Underlying the Bishops' Pastoral Letter on Catholic Social Teaching and the US Economy. International Journal of Social Economics, 14(1), 3-15.
