Proof of Market Failure in Business Economics

Running head: BUSINESS ECONOMICS
Business Economics
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Table of Contents
Answer a.....................................................................................................................................2
Proof of market failure...........................................................................................................2
Answer b....................................................................................................................................4
Ongoing Policies to Deal with Market Failure:.....................................................................4
Answer c.....................................................................................................................................5
Recommendable Policies to reduce market failure................................................................5
References..................................................................................................................................8

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Answer a
Proof of market failure
Market failure takes place when market performance is not satisfactory, equitable and
fair. In presence of market failure inefficient allocation of resources leads to inefficient
distribution or allocation of goods and services. The reasons behind market failure are
incomplete and imperfect markets, incomplete divisibility of products and factors of
production and common property resources. Except these all, the common reasons are
externalities and lack of information and knowledge (Cowell 2018). Externalities are divided
in two types, positive externality and negative externality. Externality is a result of an
individual or industrial activity which influence the third party of an activity without
affecting the price in the market. Positive externality occurs when the consumption or the
production of goods and services causes advantage to other parties. If the production or the
consumption of goods and services leave unintended consequences for other parties, then it is
called a negative externality. If there is negative externality, then the social marginal cost will
be higher. As private parties do not consider the external cost of production, free market
produces a quantity higher than the socially efficient one (Baumol and Blinder 2015).
In Malaysia, food culture is transforming onto a culture of waste. Statistics from Solid
Waste Corporation of Malaysia reflects that the amount of food waste was 15000 tones on
daily basis in the year 2015 which includes 3000 tons of food waste which is consumable and
should not be wasted. Factors leading to market failure associated with food wastes are as
follows
Lack of Information: First dispute is if there is any proof of market failure which needs to
be corrected. Market failure caused by food waste means there is excess production of food
and consumption is more than the need of individuals. In Malaysia, 8000 tons of food waste

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out of aggregate food waste is avoidable only. This misbalance in production and
consumption caused by the lack of information. This indicates the producers have not proper
information about the market demand. This means there exists information asymmetry in the
market. On daily basis, out of 8000 tons of avoidable food waste 3000 tons of edible food is
going to landfills (Lim et al. 2016). There also exists lack of knowledge process of proper
storage, processing of food and preparation of food.
Externalities: Food wastes are an important source of pollution. When these wastes are
disposed of in the landfill they become a source of methane generation. Food wastes can emit
as much as carbon pollution as passengers’ vehicles can. This creates a negative externality.
The costs to society can be related to the process at any stage of the process which starts with
the production and ends with the disposal of waste. These costs are not paid by the market
players. The cost to the landfills in Malaysia is not fully paid and they are in bad condition.
These landfills are not operated in proper manners with protective measures. Through giving
out on the landfill and emission of methane and greenhouse gases, food waste has an effect
on changing environment (Zen, Noor and Yusuf 2014). In the process of food waste
disposition, depending on the landfills ends in releasing green house gases.