Market Failure: Positive Externalities Due to Production
Country: Singapore
Example: First Aid Classes
Market is a place where buyers and sellers come together to carry out an economic transaction.
Market failure is caused when the free market which is controlled by the laws of supply and
demand and unable to allocate resources at a socially optimal level. Externalities is the cost or
benefit incurred by a 3rd party who is not involved in the economic transaction.
The marginal social benefit is the combination of the marginal private costs and externalities.
While the marginal social cost is the combination of the marginal private costs and
externalities. A positive externality is when some of the benefits of an economics transaction
spill over to a 3rd party. The marginal cost is represented by a upward curve while the marginal
benefit is represented by a downward curve. When there is an externality it results in the
creation of deadweight loss, also known as net welfare loss. It is created when the market does
not operate at its maximum efficiency and operated above the equilibrium point, the
equilibrium point is when the marginal private benefit is equal to the marginal private cost.
Deadweight loss is the result of inefficiency created; this can be due to positive externalities
created in production.
Positive externalities due to production results in market inefficiency; It causes the marginal
private cost to shift towards the right. Since the marginal social cost is the marginal private
cost-plus externalities, the new curve becomes the marginal social cost. This results in the
quantity produced to increase and move away from the socially optimum level, this causes a
deadweight loss, which results in misallocation of resources and is the cause of market failure.
Fig 1.1
As seen in Fig 1.1 due to positive externalities caused in production the MPC curve shifts to the
left and forms the MSC curve; This implies that the new socially efficient point C is below the
market equilibrium point A. This results in inefficiencies in the market. The deadweight loss
represented by the triangle ABC is the result of underproduction of the good. The misallocation
of resources represented by the welfare loss.
An example of market failure due to positive externalities in production is the service of first aid
classes provided. This economic activity has a positive externality as its effects spillover to the
community, as these industrial companies which provide these classes increase workforce
safety and these classes might result in lives saved outside the company.
Policies such as subsidies and laws and regulations will be effective in solving this type of
market failure. Singapore has implemented such policies to help solve the market failure for
first aid classes, by reducing prices for such classes and as a result making it more affordable.
They have also introduced a law which mandates first aid classes for industrial companies.
A subsidy is a grant provided by the government to reduce the cost of production for a good or
service. These subsidies are often passed on to the consumer, who can enjoy lower prices. This
is exactly what the Singapore is trying to do; by providing these subsidies the government
reduces the cost of first aid classes
A subsidy shifts the supply curve and means that the deadweight loss can be reduced as the
good is produced at a socially optimum level this causes the price to reduce and the quantity to
produced to increase. But measuring a subsidies success is difficult, and by subsidizing certain
industries they might need to increase the tax for other industries.
Another effective solution used by the Singapore government are laws and regulations. The
Singapore government has introduced in 2006 the WSH act which makes it a mandate that any
industrial workspace requires certified first aid responders. This solution might not be as
effective as it is difficult to enforce such a law