Market Failure

Read this section for a more detailed look at the topic of market failure. Attempt the "Try It” problem before checking your answer.



In the absence of any regulation, chip producers are not faced with the costs of the pollution their operations generate. The market price is thus P1 and the quantity Q1. The efficiency condition is not met; the price is lower and the quantity greater than would be efficient. If producers were forced to face the cost of their pollution as well as other production costs, the supply curve would shift to S2, the price would rise to P2, and the quantity would fall to Q2. The new solution satisfies the efficiency condition.